Advisers are fearful restrictions in professional indemnity insurance cover are spreading in response to defined benefit transfer risks.
Financial planners have told Money Marketing that insurers are continuing to take a sceptical view of any DB transfer business amid a slew of negative headlines around British Steel and other well-documented DB scheme failures.
Some have said they can no longer get run-off cover for past business, in addition to limited options for forward-looking business.
Managing director of Cheshire-based IFA Strategic Investment Solutions Brendon Jones argues the market has become tighter since May, when the FCA decided against allowing advisers to start from a neutral assumption regarding DB transfer suitability, maintaining its position that the majority of clients would not be suitable for a DB transfer.
Jones has been trying to renew his PI policy since May. The deadline is 31 July, and he feared he may miss it when speaking to Money Marketing just ahead of that date.
This is despite going to multiple brokers compared to just one in the past.
He says: “Everyone’s PI renewals up until [the FCA’s announcement] had an easier path. Since then PI insurers are using the FCA statement. It’s basically impossible to get PI. One of the main reasons is the change in the FCA’s stance.”
Strategic Investment Solutions has been operating since 2004. It has four general practitioner IFAs, with a pension transfer specialist operating as a trading style of the company since 2009.
Jones says: “It looks for us like we are not going to get PI which is a disaster. We are almost having sleepless nights. We’ve never had any trouble, we just do our work and now we can’t get insurance.”
“For a firm like us it’s not a good outcome. They won’t even give us run-off cover quotes so we can’t say we can defer for a while until the market sorts itself out.
Former Juno Moneta Capital Management financial planner Andrew Boyt says he expects the true measure of the PI market to come in the third and fourth quarters when more advisers are renewing their policies.
He says: “The aggregate basis of PI is the problem. Most other contingent liability contracts are based on who held the cover when the event took place, not when it was notified.”
“With 30 years of aggregated liability in some firms, underwriting is harsh. It can also be seen as anti-competitive since providers won’t want to compete for past liabilities on this basis, whereas an annually renewable contract based on recent claims experience and probability of claims during the next year on standalone basis would increase competition.”
The FCA is currently weighing up a number of changes to the PI market as part of its consultation on Financial Services Compensation Scheme reform. These include preventing PI policies from stopping the FSCS from making a claim on the policy because they were able to exclude claims where the adviser becomes insolvent.
However, it has already decided against requiring IFAs to hold a surety bond as a form of run-off cover or hold money in trust should certain business lines be excluded from a PI policy.
The consultation closed this week.
Aegon pensions director Steven Cameron says the FCA must give “top priority” to DB transfer issues when considering the future of PI reform.
He says: “The FCA’s proposal to ban PI insurance policies from placing limits on claims where the adviser firm is insolvent have merit. It doesn’t seem fair to allow some adviser firms to opt for a limited, and so cheaper PI insurance policy, which then risks passing a higher liability over to the FSCS should the firm become insolvent. With no PI limits, overall FSCS levies should fall, benefitting all advisers.
“However, there are growing concerns adviser firms offering defined benefit transfer advice are facing challenges finding affordable PI. We can’t afford removing claims limits to lead to further shrinkage in the PI market, potentially denying thousands of customers from access to advice on DB transfers. We’re urging the FCA to consider these two issues together, with the top priority given to the DB transfer issue.
“Importantly, the FSCS should be a backstop when other means of compensating clients fail, and appropriate PI insurance is an important part of that ‘first line of defence’.”
Fifteen large PI insurers service around 67 per cent of the personal investment market, according to FCA statistics. One dropped out between when the data was collected last year and when the consultation was published in May.
When asked by the FCA about the likely impact of preventing exclusions for insolvent firms, one provider said PI premiums might increase 25 per cent as a result, and seven said they might exit the market if the change went ahead.
Six said they either did not exclude or could not provide an estimate that there would be an increase, and these made up nearly two-thirds of the market share of the sample, the FCA found.
Nearly half of advisers have switched PI providers in the past five years, suggesting a competitive market where any cost increases from the FCA’s change could be mitigated by advisers changing who they get coverage from.