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No quick solution to recurring PI poser

IFAs waiting for a new Aifa initiative to take the sting out of

professional indemnity insurance are in for a long wait as it could take

yearsto bear fruit.

It may even prove ineffectual – unless the pitfalls of past projects are

avoided – as more and more products come up for review, keeping the cost of

PI high.

The pension review originally triggered the cost of PI insurance to soar

almost overnight.

PYV managing director Ian Boscoe says: “The review caused a major hike in

premiums and bigger excesses. In fact, premiums doubled.”

At present, a sole trader with an income of between £50,000 and £100,000

has to pay out an average of £2,000- £2,500 a year. But that is just for

the basics.

Excesses for the review and FSAVCs cost a minimum of £5,000 annually or 3

per cent of an IFA&#39s salary.

The excess for endowments is currently a mini-mum of £1,000 or 1 per cent

of income. Normal excesses, for example, for IFAs involved in mergers and

acquisitions are also set at 1 per cent.

There is no getting out of buying PI, given that it is now compulsory

under FSA regulations.

The cost of PI has led to some animosity between IFAs and insurers,

especially after premiums for some advisers rose by 300 per cent last year,

so Aifa stepped in to try and sort things out.

The association joined forces with the ABI&#39s life offices group last

November and the Pass review to hammer out a strategy. They wanted to raise

risk management standards in the IFA sector so that the number of PI claims

would fall, thereby driving down the cost of cover.

Money Marketing revealed the results of the talks last week. IFAs will be

given access to Pass review-style healthchecks which will show them where

there are gaps in their risk management. But Aifa says IFAs first have to

be aware of the need for such risk management and assessment and it plans

to “open up the lines of communication”.

One of the bidders for the healthchecks, which will be administered for a

fee, says: “There is a long-standing lack of communication between both

sides which has given rise to a gap of mistrust. IFAs need to understand

that adding quality to their procedures will give them a better reception

in the PI market and, on the other side, PI insurers need to appreciate the

quality of the market.”

Gaps which could be thrown up by the healthchecks include record-keeping

and various aspects of service such as fact-finds, best advice, product

searches and reasons-why letters. There could also be problems with claims

handling and remuneration.

IFAs and insurers have welcomed the initiative.

Boscoe says: “The health- check is sensible if it flushes out weak areas

which could affect the cost of indemnity. This is obviously of great

benefit to IFAs.”

But the downside is that it is expected to take years before it makes an


PI insurer Collegiate managing director Tony Howe says: “Insurers look at

six years&#39 worth of business when assessing liabilities. One year of good

risk management is not enough to bring down the cost.

“In fact, it could have the opposite effect. If the healthcheck reveals

bad risk management, the underwriter could incorporate that in an increased


Howe says the risk review is unlikely to have a big impact while the FSAVC

and endowment reviews have the eff- ect of driving premiums up.

A previous risk management initiative by PI insurers 10 years ago

floundered due to its expense and cumbersome practices.

With other factors stacked against it, such as the existing communication

barrier, it seems that the Aifa project has a lot of goodwill butis facing

an uphill struggle to succeed.


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