Days on from introduction of a £350,000 compensation limit, many advisers remain in the dark over the impact on their cover
The switch to a higher Financial Ombudsman Service compensation limit of £350,000 on 1 April has arrived. There has been a lot of concern about what the effect on advice firms and professional indemnity insurers will be.
Last month, adviser trade body Libertatem said it wanted to create a “steering committee” of industry professionals to challenge the FCA about the increase to the compensation limit, which is going up by £200,000.
Anecdotally, some fear the number of firms providing defined benefit transfer advice will fall, while others worry insurers will not improve the terms of their cover to reflect the higher compensation limit.
In terms of figures, the FCA estimates PI insurance premiums could go up by 140 per cent and may force 1,000 “higher-risk” IFAs to leave the market. The worst-case scenario modelled by insurers sees premium hikes of between 200 and 500 per cent, but the watchdog does not believe this will materialise.
Money Marketing canvassed PI insurers before the limit rise to see if they would match the higher FOS payout in the cover they give or whether terms could vary depending on the sort of advice that is underwritten. Some insurers say they will match the ombudsman’s higher limit with no conditions, while others are waiting for more guidance from the FCA.
Trade body Pimfa has raised the alarm about the lack of preparation in the profession.
It notes that a number of insurance companies are still unable to confirm whether they will be able to offer terms reflecting the increased limit, with less than a week before the rules are implemented.
Pimfa also says many firms currently seeking to renew will not be able to obtain cover reflecting the revised FOS limit by 1 April. So what are advisers and insurers doing about the change?
A commentator on the Money Marketing website says their premium rate has gone down for their advice firm, as they are very low-risk and do not work on DB transfers.
But they also note PI insurers are not offering terms to cover claims up to the new limit of £350,000, only the lower one of £150,000. This means their firm will be in breach of capital adequacy requirements the day it renews cover, the adviser believes.
They add: “With no PI to cover the difference between £150,000 and £350,000, in theory we have to increase our capital adequacy from £20,000 to £220,000, and funnily enough, I don’t have a spare £200,000 in my back pocket I can get in to the business account in under two weeks.”
In its results published on 22 March, support service provider and network Tenet Group said its “competitive” PI insurance offering had helped the firm overcome a “challenging market environment”, boosting the group’s revenues.
The results also said that Paragon, the group’s captive insurance company, continued to provide “stable” PI cover, and offer lifetime run-off cover to both ex-members and current members.
When asked how Paragon would approach the higher award limit, Tenet Group says its cover will be the same for FOS or legal cases, in that it does not set a single claim limit.
It also says there is comprehensive cover for all sectors and no exclusions. Tenet Group risk and regulatory director Caroline Bradley says: “The increase in the compensation limit is likely to push up PI insurance premiums for advisers, specifically given the concerns regarding DB cases in the market generally.
“Advisers should check their PI cover to ensure it covers the full £350,000 limit. If not, there is a requirement for directly authorised firms to hold higher capital.”
Insurer Liberty Specialty Markets says it is unable to comment publicly about individual cases as it is waiting for further information from the FCA and will consider any appropriate action in light of its guidance.
Fellow insurer AmTrust Europe did not provide comment in time for publication.
The fullness of time
The direction of travel is still uncertain for now, which PI brokers must also be aware of.
O3 Insurance Solutions managing director Jamie Newell says: “Insurers will be increasing premiums slightly and it is hard to identify whether it is down to the higher FOS limit or the risk profile of DB transfers. It is a very small market and the insurers have got a monopoly.
“It is too early to say what is driving higher premiums and we have not had many risk profile quotations. But once we get through the end of April, we will be able to see what percentage of DB transfers is driving higher premiums.”
Newell argues a small number of claims over the next year could have a significant impact on the market.
He says: “If we get 100 DB claims over the next 12 months and FOS pays out £350,000 for every claim, it would mean £3.5m is spread across 5,000 authorised firms. Each firm would have to pay £7,000 more in premiums per year and that would be a 70 per cent increase.
“If there was the equivalent of 100 claims, each worth £150,000, divided across 5,000 firms, the average increase in premium per firm would be 35 per cent.”
With a range of figures being bandied about over how premiums will increase, it is important advisers remain level-headed about what might happen. It seems everyone will have a clearer picture of where they stand within a couple of months anyway.