Will the cost of PI drive advice firm consolidation?

The West Australian financial planning firm which had its Australian Financial Services License (AFSL) suspended for at least 10 weeks to allow it to secure professional indemnity (PI) insurance may represent the tip of the iceberg.

Financial planning group executives have told Money Management that PI insurance has become increasingly difficult to secure and that the West Australian firm, Ballast Financial Management, will probably not be the last to come to the notice of the regulator.

Importantly, in the context of obtaining PI cover, a director and responsible manager of Ballast, Wayne Blazejczyk, was in January banned by the Australian Securities and Investments Commission from providing financial services for five years for failing to meet best interests obligations.

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The senior planning executives said obtaining PI cover was difficult but would have proved really difficult for any business regarded as having compliance issues.

“The PI market is the hardest I have ever seen, insurers are withdrawing from the market and the new underwriting requirements are extensive for this cycle,” the chief executive of CountPlus, Matthew Rowe said.

“It is all about the quality of your risk management processes, access to a balance sheet and your capital keel, systems and real time data driven supervision and monitoring,” he said. “You can’t just say you have these things, you need to prove that you have them and also that you are taking a zero tolerance approach to non-compliance.”

“The days of a tick a box renewal applications are over, insurers are rationing capital and are being selective in who they back,” Rowe said.

Other planning group executives agreed with Rowe that the already tight PI market had proved even tighter over the past 18 months, with it now not being unusual for firms to pay as much as two or three times turnover to secure PI cover.

“Some of the luckier ones with good compliance records may be paying 1.8 to 2.5 times turnover, but they are the exception rather than the rule,” he said.

Rowe said he was aware of a lot of anecdotal discussions around small and mid-sized AFSL’s not being renewed and attributed this to the simple fact there wasn’t the capital in the insurance pool willing to be deployed to underwrite financial advice risk for under-resourced players.

“We have renewed our PI with a reduced deductible and guaranteed rates for the next 18 months that give certainty to Count Financial advisers, I suspect we will be one of the few players that will achieve this outcome,” he said.

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This is a disgrace.

The LNP Gov are as much to blame as anyone. Labor orchestrated the vilifying of financial planners above all else, and the sycophants placed within ASIC during the Labor Gov's reign have eagerly prosecuted and persecuted to that end, but the Lib's have done nothing that hasn't perpetuated it since.

Add to that an unfriendly Ombudsmen and now complaints resolution service that look for ways to find in favour of the complainant and actively coaches them to this end, as well as mass reparation from the banks who have given up fighting, and its created the perfect storm for PI premium affordability.

Hume/Wilson/Falinski, as much good as they're doing trying to unravel the corruption and lies within the industry super system, should also be focusing on this aspect, as without a strong planning community, the unions and Labor will have won as there will be virtually no opposition to their ISA gravy train, except the likes of IOOF.

Sounds like this is all too late. People and business exiting, cost of business and continuing to do business going sky high and clients wanting to push fees lower and lower and comparing digital to human advice. Something has to give and unfortunately it looks like the adviser, staff and business will be the ones that are forced out. Throw in on top of all this the cost of cybersecurity not just insurance. Maybe the full service adviser that provided financial advice for all will go the way of the dodo and many other industries that government did not see that the patient is hanging on with life support.

Hang on! I recently read an article where some insurance brokers were saying there will be a soft market next year. I noticed they didn't say how though. Doesn't look like it to me. Our broker says there are more insurers pulling out of AFSL insurance and that COVID will continue to affect all insurance markets for, at least, the next 2 years.

Hi Confused, I understand the confusion. As an insurance broker that specialises in this area, the markets will not turn so dramatically to be considered "soft" next year, but there are glimmers that the continued hardening will moderate. ie that supply will improve. This recent article out of Lloyds supports this thought, albeit it is very broad commentary - not financial planner specific. The reality is the good insurers in Australia who support the right financial planners are profitable and would support further if they could get additional capacity. https://www.reinsurancene.ws/lloyds-targets-15bn-of-new-business-13-grow...

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