How professional indemnity insurers cover defined benefit transfers is coming under pressure as fears mount that high-risk business could be left vulnerable.
IFAs and their PI insurers need to be on their toes as the FCA launches further investigations into transfers while the Financial Ombudsman Service waits in the background to handle complaints.
The potential for a large volume of transfer claims means the cost of insurance could increase, and IFAs could find it difficult to renew existing policies, and have to pay higher premiums and excesses, or face reduced coverage.
Money Marketing has spoken to a range of brokers and advisers to see whether the PI market will stand up to heightened scrutiny.
Brokers banking on suitability
Protean Risk head of IFAs Julian Brincat says transfers have been a priority for PI insurers for a number of years already.
He says: “Insurers have varying thresholds from one to the other but generally speaking we have definitely seen an increase in premiums, excesses and restrictions applied to policies for firms that are more active in advising on DB transfers. Insurers frequently request more detailed information on a firm’s DB processes in order to feel comfortable covering this activity.”
Firms that have a large spike in DB activity but cannot demonstrate they have suitable processes in place find it harder to renew insurance.
Brincat adds: “This is one of the main reasons for non-renewal currently, meaning that the IFA has to approach new insurers to find suitable cover. We do see a number of firms approaching us in this scenario, unfortunately sometimes quite late on in the renewal process, but we have been in a position to successfully negotiate terms for them.”
Pii Brokers managing director Jamie Goodier also sees underwriters looking more closely at firms undertaking DB transfers and being more cautious about how much coverage they provide.
More FCA clarity on transfers should make transfers less risky and drive down the cost of insurance
He says: “Some insurers are applying more restrictive terms if the number of transfers is disproportionately high compared to the size of the firm.
“Underwriters are unable to review each DB transfer file to determine if it was suitable and therefore tend to concentrate on the numbers.”
While DB transfers are viewed negatively by some market watchers, PI insurers do recognise both the positive reasons to transfer and the FCA’s concerns about them.
Goodier says: “There are often valid reasons for recommending a transfer and we often encourage insureds to outline their firm’s philosophy for doing so.
“Insurers are mindful of the regulator’s presence and are aware that the FCA has asked to review some firms DB transfer suitability reports.
“Unless there is a regulatory review or claims management firms decide it is the next big opportunity we expect the PII market to have a fairly benign reaction to DB transfers.”
Advisers stay ahead
Rowley Turton Private Wealth Management director Scott Gallacher says maintaining future PI cover has been one of the major concerns of many advisers doing transfers.
While the cost of insurance, at least for his firm, has remained broadly the same since 2015, he says, it is not easy for IFAs to change their providers. “Personally the time and hassle of changing providers is a barrier to shopping around too frequently. That said we have a very good specialist broker who helps a lot,” he says.
Zero Support managing director Phil Young has observed some initial signs of excesses increasing although he does not know of any IFAs yet who have been unable to renew their insurance or PI providers who have removed cover.
Some insurers are applying more restrictive terms if the number of transfers is disproportionately high compared to the size of the firm
He says: “I’ve heard that excesses are being increased by PI providers and some are also asking more questions about process and external auditing where volumes of transfers are high.
“I’m also not sure if cover has been refused but have heard reports of excesses going up while two brokers have told me they expect PI costs to go up across the board in 2018 in anticipation of DB problems.”
Although the picture on how easy it is for advisers to renew insurance on transfers is hard to establish, director of Howden’s professional indemnity division Steve Ray thinks advisers have to be prepared to answer tough questions from their PI providers.
He suggests IFAs prepare by gathering all relevant information and documenting the process so insurers understand how they do transfers.
This should allow firms to not only keep records on their processes up to date but also allow them to summarise information for insurers when it is time to renew their policies. Similarly, IFAs should keep abreast of what the FCA thinks is best practice.
Unfortunately the FCA’s lack of clarity on DB transfers only makes the life of advisers more complex when it comes to PI coverage, according to partner at law firm DWF Harriet Quiney.
While a visit by the FCA to a firm that does transfers is not a sufficient basis for a notification to insurers, an adviser should tell their insurer if the regulator has been in contact with them about transfers.
Quiney says: “If the IFA does not notify the insurer that the FCA has requested information or announced a visit, this could backfire as the insurer could say that this was relevant information that they should have been made aware of. If in any doubt, IFAs who have concerns should speak to their brokers to obtain advice on what and when to notify.”
Aegon pensions director Steven Cameron argues the FCA is the prime mover when it comes to removing any difficulties IFAs have around insurance coverage regarding transfers. He says: “The FCA is critical here in two regards. Firstly, more clarity on DB to defined contribution transfers should in theory make transfers less risky and drive down the cost
“Secondly, the FCA says it will collect data on all firms which do pension transfers. The data it collects should over time build a picture of what firms are more or less risky. PI insurers should be able to access and use such data to underwrite insurance for IFAs doing transfers in the future.”
Although coverage for pension transfers is a challenging area, experts agree IFAs should be in contact with their PI providers on a regular basis to ensure the best deal. Left without coverage, the profession could pay a dear price in Financial Services Compensation Scheme and FOS bills should firms fall foul of the FCA.
Expert view: Russell Facer, managing director, Threesixty
Having a good relationship between your firm and insurer is very important in the context of covering pension transfers. If you are changing your insurer on a regular basis you will not have time to develop the relationship. Doing a lot of DB pension transfers is not necessarily a bad thing as you will be used to doing them. However, a firm that does one or two a year is arguably exposed to more risk as they are not aware of their complexity.
Furthermore, firms that have multiple revenue streams and do not rely solely on DB transfers have less to worry about if transfers go wrong as they should be insulated from the problem. Such a firm should have sufficient capital to weather any issues arising from transfers.
Beyond this, what processes and controls does your firm have in place? You should be able to evidence what the transfer processes are and document them. Also you should be able to show how you educate clients who want to transfer and record what type of clients you take on board.
Any insurer will look at its book and what level of risk it wants to underwrite. Firms that are doing more transfers are probably going to more specialist insurers to cover the extra business they have picked up. They are probably paying higher excesses here and it is not surprising this is the case.
The key thing for the individual firm is to have good relationship with the client and good propositions. Generally speaking, if a firm lives and breathes such a mantra, that will stand them in good stead with their PI insurer. The vast majority of advisers want to get this right. Regulatory interest is not a bad thing as it will keep the market competitive.