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Is vision of unity with insurers PI in the sky?

The Financial Ombudsman Service chief ombudsman wants to forge a new relationship with IFAs free from the influence of PI insurers.

But will his mission succeed given the difficulties with the PI sector and IFAs&#39 annoyance at having to pay £500 every time they are involved with a case that is taken to the ombudsman?

Speaking at the recent Aifa conference in London, chief ombudsman Walter Merricks said he wanted a new relationship with IFAs without allowing PI insurers to sour relations as they have done in the past by encouraging an “admit nothing” attitude.

Merricks said: “The PI insurer will often advise the IFA to admit nothing. Due to the number of pension review cases currently being handled by the main PI insurers, it can take months to receive a response.”

As a result, he said, a significant proportion of cases are outstanding after a year due to the unseen participation of PI insurers.

But PI broker Collegiate managing director Tony Howe has leapt to the defence of the insurers. He says PI insurers as a breed tend to keep to the letter of the law and that is why they instruct IFA clients to remain tight-lipped.

He says: “It is unfair to stereotype PI insurers and blame them for grievances with the ombudsman.”

But Merricks is anxious to smooth things over. In response to IFAs&#39 complaints about the £500 charge they have to pay for cases brought against them, he has announced that a new funding model is on the way.

He also hopes to establish contact with PI insurers because he thinks they play a vital role. “We want to establish a dialogue so that both sides can understand each other,” says Merricks.

He believes Aifa&#39s PI forum could be the place to do this and is calling on Aifa to find room for him round the table.

The PI forum was set up earlier this year to deal with the mistrust and lack of understanding which exists between those who grant PI insurance and those who need it. The mistrust dates back to the time when the cost of PI was sent through the roof by the pension review.

The forum – a joint venture between Aifa, the ABI, the Pass review, the PI sector and the FSA – wants to drive down the cost of PI insurance by opening up channels of communication between PI underwriters, brokers and IFAs.

It appears the different parties have been blinkered to each other&#39s needs until now.

Aifa director of technical services and policy Fay Goddard says: “The three corners of the triangle do not understand each other. They are coming from different angles. IFAs are desperate to get insurance, underwriters need information and brokers want to place as much business as possible.

“But they have to look at the joint objective, namely, a stable and healthy market, in a practical manner. The way to do this is through communication.”

A big stumbling block seems to be record-keeping. Goddard says underwriters do not understand IFAs may not be able to comply readily when they are asked for, say, 12 years of records. She says underwriters will have to accept there may be unknown elements.

IFAs, for their part, fear disclosing too much will see them lumbered with expensive insurance or no insurance at all.

This is where brokers step in. Their role should be to help IFAs complete proposal forms clearly and accurately and to resolve any queries from underwriters. Of course, IFAs have to help by being as open as possible.

The PI forum will focus on standards in the IFA sector as well as on communication. Aifa believes that once the number of claims is brought down, the cost of cover will come down too.

Its first success, apart from getting all parties to come to the table, has been some well-received guidance on PI cover in relation to the FSAVC review. The guidance covers issues such as when to notify and how to complete proposal forms.

The next meeting of the forum is in early November. A number of issues will be discussed, including the role of brokers, state of the market and effectiveness of guidance.

But the initiative is expected to take years to make an impact due to the legacy of poor record-keeping and emergence of FSAVC and endowment sales as serious issues.

PYV managing director Ian Boscoe says IFAs will typically see premiums soar by between three and four times their present levels due largely to underwriters&#39 concerns about endowments. On the back of a 300 per cent increase last year, this is bound to lead to bad feeling among IFAs.

Boscoe predicts policy excesses for the next year will be the equivalent of 3 per cent of turnover for pension and FSAVC claims and 1 per cent for endowments. This will mean excesses of £3,000 on a turnover of £100,000.

He says underwriters are worried about endowments because they do not yet know how many claims there will be. But other factors which have sent PI premiums skyrocketing are the pension review, bulletins 7 and 8, the FSAVC review, mortality rates and the collapse of the annuity market.

With all these factors stacked against good relations within the PI sector, it seems the Aifa project is facing an uphill struggle to succeed despite all the goodwill.

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