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PI in the sky and small firms will bear the brunt

It looks like the little man is about to get the rough end of the stick on professional indemnity cover.

Network DBS revealed last week that its PI premiums for the coming year have doubled and voiced its fears that the rest of the industry is again facing spiralling PI costs.

About a third of IFAs renew their PI policies in November and negotiations are presently taking place. Huddersfield-based DBS is traditionally one of the first to negotiate.

Although PI premiums have gone through the roof in recent years, networks are confident they are able to shield their members against the worst this time round through a process of negotiation. They believe they will be able to do this by dint of their size.

PI broker Ian Boscoe of PYV also subscribes to this view. He says smaller firms will be hit the hardest. DBS chief executive Tony Kempster agrees, saying there is a “bloody” time ahead because insurers are “nervous”.

Boscoe says those with an annual income of less than £100,000 are penalised because the insurers “do not consider the businesses to be viable”. This would seem to indicate sole traders are in for a rough ride but Boscoe says some IFAs with several RIs also fall into this category.

PI is typically 4 per cent of turnover for smaller firms and only 1 per cent for bigger firms.

The DBS increase will be reflected in its monthly fixed commission share which also includes charges for PIA and trade association subscriptions. The commission share will increase by £60 to £175 a month for the first RI and by £35 to £80 for each additional RI from November. About 60 per cent of DBS member firms are sole traders. Its biggest firm has 20 RIs.

DBS has managed to hold policy excess steady for a further year at £2,500. Last year, some of its rivals had excesses starting at £5,000. Kempster believes, in light of the market conditions, DBS has secured a good deal and reckons that by Christmas it will be pleased with what it has achieved.

He may be happy but not all his members are. BL Herbert Financial Services IFA Brian Herbert says: “I have not made any mistakes so I do not have to make any claims. In other words, I am paying for the mistakes of others.”

Why exactly does PI cost so much? The main difficulty for IFAs in Boscoe&#39s eyes is satisfying underwriters that procedures are being observed such as fact-finds and reasons why letters.

If these procedures are not well documented, the business will not be compliant and there will be no defence in the event of a review, making the IFA a bad risk. In this case, they could face excesses in the region of £15,000 to £20,000.

Endowments are also making PI insurers jittery. Boscoe believes they will not stop worrying until they are confident the danger of a full-blown review has passed.

Insurers are also being scared off by FSAVCs. But Boscoe believes endowments pose a bigger risk than FSAVCs in the eyes of underwriters.

The size of premiums will be determined by an IFA&#39s “population” of these cases. IFAs may be tempted to play down the numbers to save on costs but Boscoe says IFAs have to make sure they fully disclose relevant cases because non-disclosure will lead to claims being declined. He says: “IFAs should tell brokers when money is going to high- risk places.”

Other factors which have sent PI premiums rocketing are PIA bulletins seven and eight which announced the problem with the pension transfer formula, mortality rates, the collapse of the annuity market and, of course, an IFA&#39s pension review history.

He says firms will have to deal with issues such as who gets cover, what they pay and what kind of cover they can get. He believes there will be no let- up until the industry gets through the FSAVC review and the threat posed by endowments has passed.

All in all, these influences translate into increased premiums and excesses.

Boscoe says: “It is impossible to say exactly how much premiums will go up by but they are definitely going up.” His advice to IFAs is “keep calm and get a good broker”.

He says DBS has a lot of members in the expensive low-income category but that he brought down exc esses through a process of negotiation.

Misys IFA Services, which counts Countrywide, Kestrel, Financial Options and IFA Network among its stable, has had similar success. It has managed to keep PI charges the same for Countrywide members and it is optimistic it can get a reduction for Kestrel members from April 2001.

Head of marketing Andrew Bedford says: “Our size enabled us to use strength with the underwriters and we were able to disclose information fully and show the stream lined administration systems. It is the advantage of being in a network. Also, if you are bigger and have more reserves, the underwriter is more confident there will be fewer claims. What is more, smaller firms do not have the time to put a case together.”

But even he admits it is tough out there.

Bradstock Professional Liabilities PI broker Colin Plumb says: “The network market is different as they have access to different underwriters to PIA-direct IFAs and on the whole networks are better run.”

It is not just IFAs who find the issue controversial and difficult as those who provide PI have their own troubles. Even dealing with claims is a long drawn-out process. After all, it involves lawyers.

Boscoe says getting the risk placed properly is a difficult, time-consuming process that involves asking a lot of questions.

No wonder Boscoe wishes luck to the new forum on PI which aims to open up channels of communication between IFAs and insurers.

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