PI ‘not worth the paper it’s written on’

The Federal Treasury has received further warnings that the system of professional indemnity (PI) insurance covering financial advisers is badly flawed and could ultimately work to undermine the success of any compensation scheme of last resort (CSLR).

In a submission filed with the Treasury dealing with the CSLR, the managing director of The Investment Collective planning group, David French warned that “the Hayne Royal Commission, ham-fisted regulation, and unbridled powers of the external dispute resolution (EDR) scheme (now administered by AFCA) have together caused a freezing of the market for professional indemnity insurance”.

“That on its own will lead to higher claims on the proposed CSLR, making it unstable and perhaps unsustainable,” he said. “For this reason, we propose that the idea of an independent CSLR be abandoned in favour of a captive insurer.”

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“Assuming that the market for professional indemnity insurance is working properly, and with an effective CLSR in place, consumers could expect to be compensated as per any agreed determination. The fact is though, the market for professional indemnity insurance is not working properly.”

“There are numerous examples, including observed fee increases of more than 100% (even with no claims, ever), policy wordings that exclude core activities, extremely high deductibles and deductibles that apply to each and every claim individually, rather than to a class of claims,” the submission said. “Frankly, for several years now, professional indemnity insurance (for financial advisors in particular) has not been worth the paper it is written on.”

“This will, during the next downturn, lead to many businesses folding, and in turn much higher claims on the CSLR. Our view is that it is much better to recognise this now, and put in place an industry funded captive insurer.”

French said that with respect to captive insurers, the closest example he could find was Avant, which provided insurance for medical practitioners.

“Their offering covers individuals who are no longer practitioners, and Avant is the insurer of last resort in the event that a practitioner cannot access insurance elsewhere.”

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