There are relatively few advantages to having covered the financial services sector as a journalist for almost 25 years, but one of them is a sense of history: understanding when a new story is, in point of fact, a very old one.
Last week’s in-depth coverage in Money Marketing of the latest PI crisis to have engulfed the industry is one of those “new” old stories that raise their heads every few years.
The article by Katie Marriner stated there is “growing pressure to standardise professional indemnity insurance to stop claims ‘falling down the cracks’ and leaving advisers exposed to a market lacking competition”.
As Katie reminded us, among the recommendations in the recent Financial Advice Market Review was that the FCA carry out a review of the availability of PI cover for smaller advice firms. This was to be carried out after the regulator finished its review into the way the Financial Services Compensation Scheme is funded.
She pointed out “there is already disquiet” among regulators over the way the PI market works. Indeed, FSCS chief executive Mark Neale has called it “unfit for purpose”.
T’was ever thus. At the risk of sounding cynical, the PI market for advisers has not worked well for more than 20 years. Part of the problem is linked to “outside” events, the other part is determined by behaviours of advisers themselves.
For an example of the latter, you only have to look to the mid-1990s, where despite a legal challenge by Garry Heath, then chief executive at the IFAA, the Security and Investment Board was ultimately able to enforce its pension review rules on advisers.
IFAs and their insurers were forced to pay massive sums in compensation. Unsurprisingly, premiums rose dramatically in the next few years, before easing off.
During the early noughties rates fluctuated, with impossibly steep rises of up to 250 per cent at the beginning of the millennium, as indemnity providers deliberately priced their products to run down their books.
What really killed the market was the the fact that, after 9/11, huge amounts of risk capital fled the markets. This reduction in capacity meant premiums for all types of insurance soared, not just indemnity cover.
Things stayed at the same level for years, not helped by the fact that many IFAs were starting to face endowment-related claims, not forgetting split capital investment trust misselling.
Amazingly, prices levelled again in 2004-2005 and remained relatively stable for several years. Availability grew, with more insurers entering the market. Advisers enjoyed, well, if not exactly an idyllic relationship with PI providers, at least an expectation of not completely unreasonable hikes in the cost of their cover.
Over the past five or six years, things have started to go bad again. Prices are climbing, as are exclusions and excess levels. What is striking is the way indemnity providers are prepared to exclude products that were included only the previous year from the cover they offer.
It is clear that there is an increasingly unhealthy and dysfunctional relationship between PI providers and the FSCS. Many advisers are trying to shave the cost of their PI by opting for the cheapest cover, ignoring the consequences in the event of a potential claim.
Policies now have excesses that exceed firms’ capital, which means that, even if providers were willing to entertain claims against their policies, the prospect of a PI payout becomes increasingly unlikely. In turn, this makes it more likely that firms will go into into default, leaving the FSCS to raise higher levies on advisers.
The FAMR call for a review of PI cover is becoming more and more urgent, perhaps with minimum standards and wordings being imposed on providers’ policies, similar to the Association of British Insurers’ work with critical illness.
Risk-based pricing needs to be more focused, both by indemnity providers and the FSCS, with advisers being told that if the quality of their cover is poor, this will impact on the size of their FSCS levy.
Ultimately, however, a key element in this is that the market itself is inelastic. Insurers are not desperate for business and can afford to set their own premiums. If an adviser cannot pay them, the provider simply walks away.
Maybe we should consider different solutions. If insurers and some advisers cannot act in a responsible manner, perhaps it is time for the FSCS to take on the role not just of raising a levy when firms go into default but to offer a standard form of indemnity product itself.
Advisers would pay one fee: part of it insurance against potential claims and the other a levy related to any defaults that slip through the net. The FSCS should broker that risk itself and – together with advisers and their trade bodies – determine what risks and types of advice consumers are protected against and not.
The old system is broken and it is hard to see there is much will on the part of the indemnity provider side to make it work properly. Similarly, some advisers will continue to take advantage, leaving the majority to pick up the pieces via the FSCS levy. It is time to look at more radical solutions.
Nic Cicutti can be contacted at firstname.lastname@example.org. Follow him on twitter @NicCicutti