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Ex-Tenet director to develop ‘long-stop’ PI cover

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Geoffrey Clarkson

Former Tenet group director Geoffrey Clarkson is gauging appetite among insurers and brokers to create a professional indemnity insurance policy that would cover advisers’ future liabilities.

Clarkson says the initiative is not connected with Tenet, which he left earlier this month, but draws on his experience at the network where he set up Tenet’s Guernsey-based subsidiary Paragon Insurance.

Clarkson is also a former regulatory lawyer for national law firm Bond Pearce, now known as Bond Dickinson.

He says: “My idea would be to try to create a long-stop, seeing as the regulator and the Government are not prepared to do so. I would like to create a commercial solution to a legislative and regulatory problem.”

Clarkson explains his idea is that, depending on their risk profile and balance sheet exposure, adviser firms could choose to insure business risk before a given period in time, for example business written pre-2000.

He says: “With the regulator’s propensity for retrospective reviews, this allows advisory firms to de-risk the business. More importantly, it allows them to add value to the business if they are looking to sell in future. If the value goes up, the likelihood of a sale being successful also increases. The whole industry benefits by the introduction of certainty.”

Clarkson admits the cost could be potentially high, but says this will depend on a firm’s complaints history and business mix. He points out lower risk firms could find it easier to get cover under this proposal.

He is looking at two alternative options to develop the product: a model akin to Tenet’s PI subsidiary which separates higher risk and lower risk businesses, or to put together a consortium of insurers that are prepared to take on the risk.

Clarkson adds: “This is still early days. But the idea is although the premium may be costly, this kind of cover would actually add value to the business. There is a trade-off there.

“Firms can cease to trade, or become unable to meet their liabilities, or not have the capability to handle complaint cases. This would provide a solution the regulator should be pleased with, as it creates greater certainty for consumers and greater stability in the market.”

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Whilst an interesting initiative it doesn’t mean that the fight for fairness will stop.

    If the RDR has made the industry fairer and removed the bad apples then the remaining advisers deserve to be treated in the same way as every other business in the UK.

  2. This sounds too good to be true. At the risk of being classed as cynical, I think there is too much risk and not enough profit in this for insurers.

    The business of insuring financial advisers by claims arising/ made policies is a game of pass the parcel! Insurers dip in and out and it is a “gamble” as to whether they get it right, when they enter the market in any given PII year.

    If you’re the insurer who picks up the next big regulatory review, or get the historic analysis of the risk in the back book of an adviser wrong, then you will lose a lot of money.

    If the idea not a claims made/ arising policy then the insurance book has to open too long to make any profit for an insurer. You can never close off the liability in the book and therefore cannot close off any insurance years in which the policies were written. No insurer can insure on that basis.

    Also why would an insurer simply take over the risk in the tail of liability that advisers have? Why would they do that?

    There is a scheme of last resort, FSCS, designed to deal with defaults? An insurer would not want FSCS coming to it every time there was a default or regulatory review on the off-chance I might have an insurance policy that might respond and reimburse them.

    I think people should beware of this. It sounds great but is unlikely to have legs. If it does have legs, it sounds like a policy that will have very expensive premia and high excesses. Also, it will have many, many exemptions to ensure it only responds in very limited circumstances.

    Before investing time and effort into this, you will need to understand why profitable insurers would be able to accept this risk when it is so obviously painful for advisers and the industry in general?

  3. At least it’s a step in the right direction, who else has the courage to address this issue? Certainly not government or the regulator. Bravo Geoffrey!

  4. Patrick Schan 22nd May 2013 at 8:07 am

    I would be concerned that the existence of such cover might be viewed, by the regulator/government, as showing there is no need for a longstop, although if you could be sure (which of course you can’t) that a longstop was never going to be introduced it sounds like a good idea if it is workable. Well done to Mr Clarkson for looking into this possibility though.

  5. Exasperated Me 22nd May 2013 at 10:10 am

    How do you insure against the unpredictable?

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