Getting the right PII cover
The IFA Professional Indemnity Insurance (PII) market is now under the spotlight as part of the Financial Services Compensation Scheme (FSCS) funding review. The focus seems to be on enforcing a minimum level of cover to provide more certainty for buyers and to offer more protection to the FSCS fund. The circumstances that have brought us to this point include the wide variance in policy terms and conditions and the emergence of high excesses for specific activities, leading to calls that PII is not fulfilling its role.
It is difficult to predict what the result will be on the IFA PII market until the Financial Conduct Authority (FCA) consultation completes and they provide a definitive direction. However, in our view, the issues that the sector is facing would not necessarily be resolved by imposing mandated wordings on PII Insurers, as this could have negative effects in terms of cost and competition. If the wording is set at a higher level than insurers currently offer it would probably be reflected in an increase in cost. Ultimately it could also lead to insurers pulling out of the PII market, especially if they are unable or unwilling to provide certain aspects of the mandatory cover.
The current issues largely stem from challenges that underwriters face when attempting to assess the ongoing IFA exposures. This includes the impact of actions taken by the FOS and FCA. Whilst Financial Ombudsman Service (FOS) decisions are proving impossible to predict as they do not appear to follow a precedent or clear rule of law, the FCA has also had a role to play as several retrospective announcements (such as EEA and Connaught) have inevitably caused an increased level of successful claims against IFAs. Insurers have tried to minimise losses against these issues, especially in relation to unregulated collective investment schemes (UCIS) in recent years, and now face emerging concerns such as defined benefit (DB) transfers where we are again seeing an increasing number of exclusions being applied in the market and the FCA themselves suggesting a marked increase in FSCS claims as a result.
As a broker, it is now as now more important than ever to identify and promote to underwriters the firms that have invested in stronger systems and advice, as this is clearly an area that underwriters value when considering offering broader levels of coverage and competitive price. Where insurers can see clear evidence of strong compliance management including file checking and audits and peer reviews they will be encouraged to factor these aspects into premium rating.
So, to ensure your IFA is treated individually rather than as “one of the crowd” ensure you focus on strengthening and then, importantly, communicating your risk management.