A fragmented and ‘barely functioning’ Professional Indemnity (PI) insurance market is the biggest threat to adviser businesses as we head into 2020, the chairman of Beaufort Group has said.
Simon Goldthorpe said at an industry level, there was now clear fallout from the move by insurers to step back from this market.
“The PI insurance market has seen a huge contraction in the number of insurers operating within it,” he said.
“As a result we now have a situation where firms that are already insured are struggling to change insurer, and the best an adviser business can often do is hope that its existing insurer will renew.
“There are now so few insurers left it may not even really be considered a market. Those that have remained can just cherry pick what business they want to do, and the industry is not far off the situation where there are no insurers left to cover IFAs at all.”
Rather than offer full cover, many insurers are now adding restrictions to policies so they are not on the hook in areas such as DB transfers.
That in turn means adviser firms can only operate if they hold additional capital themselves to cover their own activities.
“A lot of insurers now have terms and conditions that say: ‘We’re not covering DB transfers. We’ll provide a regulatory minimum to insure, but we’ll add restrictions,” Goldthorpe said.
“Once you’ve got restrictions, the risk is that the cover that you need is potentially missing, when you need it the most.”
The alternative to restrictions on PI insurance is soaring excesses. Goldthorpe said he has heard of excesses going up five-fold over the last five years.
“Five years ago, a typical excess would have been £2,500-£5,000 per case. Now, £25,000 excesses are not uncommon. We saw a case last year that was £50,000. If you’re paying the first £50,000 of every claim, that’s not really insurance.
“This is a huge threat to IFAs, and in most cases it has occurred through no fault of their own. It needs addressing urgently as the market we have now is very inefficient.”
The situation shows little sign of improving as we move into 2020, Goldthorpe added, with insurers’ books renewing in early January, at which point they will look to fill quotas quickly and then walk away from the market.
“IFA firms used to be able to insure themselves for around 1-1.5% of their turnover. But now, that figure looks more like 2.5-3%. This could happen to good quality firms that have a fairly low risk profile,” he said.
“Where that leaves the rest of them is either facing higher premiums or having policies with so many restrictions that they are basically self-insured.”