Professional indemnity insurance providers have acknowledged that they see DB pension transfers as a high-risk area, as experts continue to express fears over the breadth of coverage for IFAs.
While the FCA recently proposed measures to stop PI policies from excluding the Financial Services Compensation Scheme as a claimant and discussed the possibility of a pooled fund for business outside PI coverage to offset FSCS bills, advisers are reporting that PI bills are continuing to rise for DB transfers and it is becoming increasing difficult to find cover for them.
Insurers are describing DB transfers as “high-risk” and, while brokers say there is still cover available, there is a “cautious” attitude in the market to insuring potential liabilities.
There are also complaints that terms and conditions around DB transfer coverage are being changed without forewarning.
Compliance and Training Solutions director Mel Holman says: “We have got firms who have been doing DB work but are full financial planning firms doing cashflow modelling, doing everything well with the work.
“We were expecting excesses and premiums to go up, but there doesn’t seem to be any warning. The PI people know they are doing transfers – they disclose that in the form – but it seems to be a case of don’t bother applying to us if you need any cover.”
“Firms we have are not actively looking for DB business. They are doing a proper job, but insurers don’t seem to be looking at the whole process they have got in place and the risk charge – they just say no DB.
“If the underlying insurance risk changes, a bit of a heads up would be nice. People do tend to leave it until the last minute and it becomes all a bit too frantic.”
Holman notes that because PI policies work on a claims-made basis, even with compliant cover in place in previous years, claims made now may not be covered because policies had been updated since the cover was taken out.
‘Additional information’ required
Money Marketing has heard that advisers were finding difficulty finding DB transfer cover through Collegiate, which was acquired by multi-national AmTrust in 2016. While the firm says that it has not removed the offering, it says that “additional information” is being required.
AmTrust Europe head of professional indemnity Russell Newell says: “AmTrust and Collegiate continue to provide cover for DB pension transfers. We do perceive this as a high-risk area and will always ask for additional information to enable us to consider each risk on an individual basis.”
Insurance broker Lockton says that many insurers are asking similarly tough questions when it is trying to arrange DB transfer cover for its IFAs. The firm reports insurers asking for data on maximum and average transfer values, a full list of transfers conducted, information on advice processes for transfers or copies of suitability reports.
A Lockton spokesman says: “We are still actively finding solutions for firms that have an exposure to DB transfers, but insurers are approaching this with a lot of caution. The requests for information on what a particular firm has been undertaking can be quite broad.
“If it can demonstrate it has gone through the right process, it’s likely that it may be asked to have a higher deductible and that the rate applied to its premium will go up a bit, but cover can be sourced.”
Earlier this month, Money Marketing reported that Zurich had removed the bulk of its PI offering for IFAs and has no plans to re-enter the market or expand its offering beyond current services like property and casualty cover.
In its recent review of the FSCS’s funding, the FCA noted that respondents said an additional levy could be applied to DB pension transfers among other areas deemed to be higher risk. It said the upsides of tighter rules on PI insurers could be outweighed by providers exiting the market, however.
Advisers must fill in details of their PI cover through their regulatory returns on the Gabriel system, but the FCA conducted a further review of the PI market as part of the study. It found that 16 per cent of consumer claims against personal investment firms including advisers were not covered by either the PI policy or its excess, but that many of these will not have been submitted to the insurer in the first place because of the advice firm’s policy or because they were below the excess level, for example.
Further pressure on PI costs
A Money Marketing poll of 250 advisers conducted with Schroders in December last year revealed 40 per cent of advisers had already seen their premiums increase at their latest renewal. Forty-two per cent said unregulated investments should be excluded.
A similar study from Prudential last year found that more than 40 per cent of advisers were worried that insistent clients, who demand IFAs transact a DB transfer despite recommending against one, could present future liabilities that would add pressure to PI costs.
Forty-four per cent saw an increase in clients wanting to go ahead with a transfer despite advice against it and 17 per cent expected PI bills to increase.
This week, the Personal Finance Society also warned that many of its members are struggling to find PI cover for pension transfer advice.
PFS chief executive Keith Richards told the Financial Times that pension freedoms are in danger of being “derailed” if advisers continue to face problems getting adequate PI cover. Richards said many of the PFS’s 37,000 UK members are now struggling to secure PI insurance.
Richards said: “We have had a case where an adviser was declined [PI] cover renewal, with the insurer explaining it was reducing its exposure to any future [DB] transfer claims. The adviser managed to secure alternative cover, but at a significant hike in his premiums.“The pension freedoms are in great danger of being derailed if [PI] insurers continue to overreact and withdraw cover for regulated advisers and their clients.”
International Underwriting Association director Chris Jones told the newspaper that cover for IFAs in general “is often thought to be more difficult than any other class of professional indemnity”.He says: “There is a potential for substantial losses and a danger that cover can be considered as a product guarantee for failed investments recommended by the adviser”.
Higher risk fee model
The FCA has increased its scrutiny of DB pension transfers following the British Steel Pension Scheme saga, with nine advice firms so far stopping pension transfer advice.
The work and pensions select committee and the Liberal Democrats have both called for bans on contingent charging, which is seen as a higher-risk fee model by the regulator.
Aegon pensions director Steven Cameron says: “I’m hopeful the FCA’s new rules and guidance will provide regulatory clarity on DB transfer advice, ‘derisking’ this and allowing PI insurers to respond accordingly. Maybe I’m being naive. [Is it] something for the FCA to include in its review of PII market?”
Commentators note that the number of DB transfers that end up in high-risk unregulated funds through Sipps could be pushing up PI premiums for the business.
At the Money Marketing In Focus conference last year, FSCS chief executive Mark Neale told the audience that 80 per cent of compensation claims against financial advisers are for unregulated investment sales, as pension freedoms unlocked funds for savers.
As far back as 2014, insurance broker Howden noted that insurers began asking about advice on underlying assets within a Sipp based on ombudsman cases involving advisers and Sipp providers.
Currently, the FCA’s minmum limits for firms are €1,120,200 for a single claim and €1,680,300 in aggregate.
The PI market in numbers
40% saw PI bills increase at latest renewal
60% think PI is too expensive
8% have renewal periods longer than 24 months
50% have renewal periods of less than a year
42% believe PI should not cover unregulated investments
84% of consumer claims against advisers are met by PI and the excess
94% of advisers said there were no products they would like PI to cover that are generally not covered
33% of FSCS claims in life, pensions and investment intermediation caused by advisers
Source: Money Marketing and Schroders survey and FCA PI review