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PI piling up for mortgage firms

Professional indemnity insurance brokers and insurers are warning that market conditions and the FSA’s spotlight on mortgage advice mean that PI premiums could soar for some mortgage advisers.

PYV chief executive Neil Pointon says he expects that this year’s rates will be double or even quadruple last year’s premiums.

He considers that predicted falls in property prices, the credit crunch, the Northern Rock debacle and the threat of recession will increase the risk of claims and the price of PI insurance.

Pointon says: “When the markets start to fall, people have a look around for those who have been involved in advising them in this area and unfortunately mortgage brokers, similarly to financial advisers, surveyors, lawyers, even accountants, are all in the firing line.

“The threat of litigation is here and professional indemnity insurers are bound to have a look at the rates they are charging.”

Pointon believes that some mortgage intermediaries will find it difficult to maintain cover with their same insurer this year. He says: “Underwriters will actually look to prune their account because the amount of premium income that this sector by itself generates is minimal compared with the fear of the size of the exposure.”

But he adds that last year the smallest mortgage broker could have got annual cover for a premium of below £200 whereas the smallest IFA firm would have been paying around £2,000.

He says: “So if rates do increase, say they double or quadruple, then there is still a way for them to go before they catch up with what IFAs are already paying. If they cannot afford to pay those premiums, then it is questionable whether they are a solvent business in the first place.”

Collegiate underwriting director Richard Turnbull says the unknown factor is how regulatory changes will affect the market.

He says: “Although we have had fluctuations in house prices and credit crunches before, what we have not had is the FSA regulating mortgage brokers and complaints being dealt with by the Financial Ombudsman Service.

‘They are still finding their feet with regard to regulating mortgage brokers and dealing with claims. It is an unknown element that people are finding hard to price, which is why you are finding incredible uncertainty in the pricing of premiums.”

Turnbull adds that he is seeing massive variations in PI prices being quoted.

He says: “Some people are still quoting quite cheap rates of 0.3 per cent turnover but some are quoting £50,000 with £50,000 excesses on guys turning over £1m so that is a 5 per cent rate.

“I suggest that mortgage brokers get their renewal terms and if, in their opinion, they are unreasonable they should shop around a little bit.

“As far as I am aware, the schemes that insure the majority of mortgage brokers are still active in the market. Although they may hike premiums to a certain extent, I am not aware of anyone pulling out of the market or mass 100 per cent hikes in rates yet.”

Mortgage Force managing director Rob Clifford believes that hardening in the PI market is inevitable. He says PI insurers are getting nervous about failings in the intermediary market over treating customers fairly and the increased FSA focus on affordability and responsible lending.

Clifford says: “All of that increased regulatory focus and pressure on the intermediary market can generate more consumer action, which ultimately results in PI claims.”

He says there is an growing culture of compensation and many consumers are jumping on the litigation bandwagon. But he believes there is no need to panic, saying: “I am not hearing from small firms that it is becoming dramatically more expensive or impossible. Arguably, brokers who are completely focused on the more contentious players in the market, such as self-certification or sub-prime, face a risk of consumer criticism and negligence claims and so I expect their premiums to reflect that particular business mix.”

But The Mortgage Practitioner sole practitioner Danny Lovey is sceptical that premiums will rise this year, saying there is no hard evidence that the rate of claims is on the increase. He says: “I think there is speculation that premiums may go up, rather than evidence that they will. What people are saying is that because things are more difficult for people, we are going to get more claims but if everyone is doing their job properly, that should not happen.

“Just because there will be a few people out there having a difficult time who may want to try and put it on to their mortgage intermediaries, does not necessarily mean they will be successful. If you have done your job properly you cannot be held responsible if their circumstances change. If you have been badly advised at the beginning, then that is a different matter altogether.”

Towergate Lifestyle managing director Roger Crowther says: “We have no evidence to suggest that professional indemnity premiums will increase to unacceptable levels and believe that such comments are simply marketing hype. Over the last 10 years, we have worked hard to prevent huge swings in premium levels to ensure that brokers benefit from pricing stability and can budget for the coming year. Premiums throughout 2007 have fallen but are not sustainable and, as a result, are returning to 2005/06 levels.”

Association of Mortgage Intermediaries director Richard Farr believes premiums will rise but blames the media for “sensational headlines” that he says have created unnecessary hype and will contribute to rate increases.

He says: “National sentiment is going to have an effect on the underwriters of PI. You have to be realistic, filter out the hype and concentrate on the hard facts.

“Underwriters are saying they will increase premiums but they argue that the rates were very low to begin with.”

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