Consumers at risk as licensees opt for cheaper PI

Almost every single adviser (99%) has experienced year-on-year increases in their professional indemnity insurance with almost a third seeing a rise of more than 25%, according to research.

In its submission to the Quality of Advice Review, the Financial Planning Association of Australia (FPA) said PI insurance premiums cost 2%-3% of business revenue for small financial advice licensees (with set dollar minimum amounts in place).

Almost every single one (99%) said their premiums had increased year-on-year regardless of the claim history of their business.

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Some 44% had seen an increase of 10%-25%, 18% had seen an increase of 25%-50% and 15% had seen premiums rise by more than 50%.

FPA said the matter was hindered by the lack of insurers offering the product with AIG, which accounted for around 20% of premium capacity, stating it would be leaving the market in October 2022.

“The number of professional indemnity insurers has recently substantially reduced, tightening the cover available for financial advice providers and making it extremely difficult to obtain a policy that meets the mandatory requirements at an affordable price.

“This leaves little time to build capacity and reduces choice in an already difficult market,” it said.

The organisation also highlighted an unintended consequence was that licensees were taking out inappropriate policies to reduce their costs which created a consumer protection risk in the event of a complaint where the deductible was at a level where the licensee had insufficient capital to compensate consumers.

Over 40% of respondents stated they had been required to accept a higher excess to obtain PI cover in the last renewal period. Of those respondents who accepted higher excess amounts, 59% experienced excess increases of between 20% and 50%, and 24% of respondents had an excess increase of 100% and over.

Earlier this month, Money Management wrote how Australian advisers were being advised to communicate how the financial advice market had improved in order to improve the possibility of being insured by overseas firms.

The comments were echoed by findings by the Stockbrokers and Investment Advisers Association (SIAA) who said its members had struggled to obtain insurance in Australia.

“SIAA members advise that they are having to source their PI insurance cover from the London market as they are unable to source cover in Australia. Their insurance brokers have advised them that underwriters view the Australian market has having high regulatory risk.

“Those renewing cover are experiencing a significant increase in premiums and excess amounts as well as the imposition of exclusions on certain risks. With no other underwriters providing cover, there is no competition in the market.”

SIAA was concerned advisers would be unable to source affordable insurance at all at a later date or that insurers would refuse to insure them.

The FPA suggested the Review investigated solutions to PI issues, taking into consideration professional standards and individual registration of professional financial planners.

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I thought ASIC required licensees to have sufficient capital to cover PI excess, and this was monitored as part of the annual FS71 AFSL audit process?

Advisers must DEMAND to see the certificate of currency from the PI insurer and then call them to verify what they see in the document. Too many licensees have opted for unrealistic excess levels to keep premiums low and in the case of a complaint, paying out will be the only viable option as that will always be lower than the excess making the PI as something the AFSL can say they have to tick a box and to meet the licensing requirements.

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