The PI squeeze

IFA Cover Story

By Victoria Papandrea
Mon, 01 Feb 2010

Page 1 of 5

The hardened insurance market cycle has hit financial planners renewing their professional indemnity cover, but underwriters have also come under considerable pressure in recent years. Victoria Papandrea reports.

When it comes time for financial planners to renew their professional indemnity (PI) cover each year, the process can be problematic for all players involved.

With a hardened insurance cycle currently in play, a compressed PI underwriting market in force, escalating premiums and mounting claims rolling in from the recent spate of corporate collapses, the present predicament has placed pressure not only planners, but also their brokers and underwriters.

For brokers that specialise in PI insurance for the financial planning industry, such as Apex Insurance Brokers, times are indeed challenging.

"As a broker it's very tough to write financial planners at the moment. We don't actively go after financial planners because it is a tough business to write these days," Apex Insurance Brokers account manager Abraham Tavares says.

Meanwhile, whether it is satisfying the demands of their reinsurers or fearing the prospect that another PI player will exit the market, underwriters have also been kept on their toes in the past few years.

"When it comes to this industry, if you haven't got the right strategy the reinsurers will make it very difficult for you in this business," Dual Australia underwriting director Leo Abbruzzo says.

"I'd be concerned if another insurer would move on because it would put a lot of pressure on the underwriters that are still available just in regards to reinsurance.

"There are a number of rumours going around that a few underwriters are shaky in this area. I believe there are a couple that are reviewing things at the moment so it will be interesting to see how many are still standing at the end of the year."

Despite the possibility that one or more underwriters could very well exit the PI market, Abbruzzo confirms Dual has no intentions of doing so at the moment.

 "In fact, we're one of the four or five players in the market that play a very active role in this segment," he says.

"We've got a mix of financial planners out there but predominantly we are a major player with small to medium financial planners, but we do have some larger ones on our books as well."

Chartis, formerly known as AIG, has also confirmed it has no plans to cease writing new business for financial planners seeking PI cover.

"Despite the volatile claims environment, Chartis remains committed to providing insurance solutions for the financial planning profession," Chartis professional indemnity product line manager Matthew Clarke says.

Meanwhile, Vero has also confirmed it has no intention of exiting the market.

"Vero will continue to provide cover to the financial planning market and underwrite each risk on its merits," Vero professional and financial risks executive manager Alex Green says.

While other underwriters such as CGU Insurance have also confirmed they have no plans to exit the sector, they have drawn a line in the sand on the types of groups they will insure.

"While CGU is a major provider of professional indemnity for financial planners, we have a focused approach to the market," CGU Insurance professional risks national manager Jun Acance says.

"Our portfolio is weighted towards larger planning groups that are able to demonstrate comprehensive and robust risk management, training and government frameworks."

It seems the small stable of underwriters will remain intact for the time being, however, there are industry whispers circulating that Dexta, which recently rebranded under Axis Speciality Australia, is currently assessing its options.

While Axis underwriter Peter Button declined an interview, various insurance brokers' dealings with Axis have added further fuel to the speculation that this is one underwriter that is re-evaluating whether it will continue to provide PI cover to planners.

Australian Professional Risks Brokers (APR) chief executive Matthew McPhee is one such broker who has been unsuccessful for some time in obtaining a PI quote from Axis for his financial planning clients.

The PI squeeze

IFA Cover Story

By Victoria Papandrea

Page 2 of 5

"I think that Dexta is reassessing what they're going to do, they have had a number of changes in their organisation and they're now Axis, so that normally means they're going to have a review of what they're doing," McPhee says.

"We haven't at this stage had Axis say that they're definitely going to pull out, but I think it also really comes down to the risk profile of the client; if you presented them with a financial planning group that has got a certain amount of premium involved and it was a very good risk, then they're still likely to have a go.

"But from our point of view, we haven't had a lot of success with Dexta at all over the last three to four years so we wouldn't be high on their priority list to come and say hello."

Tavares shares a similar experience.

"Dexta's not necessarily writing much new PI business for financial planners. We certainly haven't been able to get new business quotes from them either from around about 12 months ago," Tavares says.

While some underwriters may be hesitant to provide financial planners with PI cover at this stage, it is worth noting that the fire still burns in the belly of some underwriters on occasion.

While CGU may only cater to the large dealer groups, McPhee recalls a recent PI tender where competition to win the business was fierce.

"We had involvement in one of the very large placements of one of the financial planners and CGU was in there," he says.

"This was due on November 30 last year and CGU was in there and really competitive; they were basically trying anything they could to win it.

"So it really does depend on the risk profile of the client and the premium involved as well because on that particular one we were talking about a premium of $1.5 million."

While underwriters would not divulge details of any particular dealer groups that they would not provide PI cover to this year, most admitted they would not provide terms on all dealer groups.

"There are probably a number of underwriters, not just at Dual, who have done their review of their particular clients and have offered them terms, or they've not offered them terms because they haven't met certain criteria, so those clients are always going to find it very difficult to get insurance, not just with Dual," Abbruzzo says.

"Reality hurts when an underwriter says to a financial planner that certain things don't meet the criteria set and they can't get insurance any longer. So those kinds of people we don't want to touch because they're not meeting the requirements . they're someone that we don't want on our books and we know a number of those people.

"But it also does come down to risk management; financial planners need to comply with certain things and certain risk management procedures and if they haven't done it, then they're going to struggle."

Clarke also confirms Chartis tends to be discerning of the financial planners it decides to include on its PI books.

"We will consider all financial planning risks, but our target market is very selective and hence we will not provide terms on all dealer groups," he says.

Meanwhile, Green says Vero assesses each risk on its individual merits. "A well-managed financial planner should always be able to obtain cover," he adds.

The ramifications of corporate collapses such as Great Southern, Timbercorp and Storm Financial have also raised the alarm for underwriters to step up their vigilance when considering which financial planners they choose to provide PI cover to.

"The recent corporate collapses have created an environment of heightened concern for us as a major insurer and we closely follow the impact of these events on the market," Green says.

"We continue to monitor the development of claims against financial planners and are particularly interested in understanding how claims could have been avoided and what differentiates the quality of financial planning advice provided."

For Chartis, Clarke says the collapses have emphasised the need to maintain a stringent underwriting process that Chartis continues to refine in response to its claims experience, as well as the changing economic and regulatory environment.

The PI squeeze

IFA Cover Story

By Victoria Papandrea

Page 3 of 5

On the other hand, underwriters such as Dual would like to see a more proactive role taken by ASIC.

"I'd like to see a bit more involvement by the regulator," Abbruzzo says.

"Industry sources say that there was enough information out there and evidence that something should have happened prior to some of these collapses. So the signs were there and some action should have been taken prior to some of these collapses happening."

Nevertheless, the spate of high-profile corporate failures together with the broader impacts of the global financial crisis has resulted in a significant escalation in claim notifications over the past two years.

"The collapses haven't seen a major impact on our policies; what we have seen is an increase in claims and notifications in this area during the past 12 to 18 months," Abbruzzo says.

While Dual has noted a substantial increase in this area, he could not provide specific information on the amount or breakdown of the types of notifications received to date.

"I believe we've still got another 12-18 months of notifications due to what we've just gone through in the past 18 months with the financial crisis," he says.

"There's added pressure on all underwriters, not just Dual; you know we get scrutinised by our capacity providers and our reinsurers, and so the pressure is put back on the underwriters to review the way they approach this segment, and that's where the pressure comes from.

"We have the capacity and are able to demonstrate to our reinsurers and our capacity providers that we've got a model that works, but when stuff like this happens questions are asked."

Vero has also experienced a large increase in the frequency of PI claims notifications in the past 18 months, with Green noting the highest frequency of these notifications has come from the financial planning profession.

"Many financial planners had clients exposed to Timbercorp and Great Southern products, therefore exact claim numbers are hard to provide as it's not yet known how many of these clients received inappropriate advice to invest in them," he says.

While Acance says CGU's exposure to the corporate collapses has been minimal, they have still experienced a rise in overall PI claims volumes for financial planners.

"This has led to an even greater focus on financial planners' risk management strategies and frameworks," he says.

"We have also introduced targeted premium increases for accounts where pricing is no longer sustainable."

Furthermore, McPhee confirms his clients have not been involved in a lot of claims that have arisen out of the corporate failures.

"But I think that's primarily because our underwriting material has really been to stay away from anyone that's been involved in the higher risk investment areas," he says.

"Timbercorp is something that's been on our radar for eight years, so if we had seen Timbercorp on a proposal form for financial planners that would be one thing that we would look at and go, 'well that's not really a fantastic risk profile'."

He says this was also the risk management protocol APR took with Great Southern.

"From our point of view, putting flags on those higher risks probably means that we didn't write as much premium as what we could have had we been more inclined to take those sorts of financial planners on," he says.

"But I think long term that's proven from our point of view because we haven't had any Timbercorp claims and we've had a couple of notifications from Storm, but those have been very low and probably not indicative of the market, because I would have thought any financial planner that had placed business with Storm would have seen a lot of notifications come through."

As the PI claims continue to roll in and wash through the system, their prolific nature is adding to the overall magnitude of rising PI premiums, which underwriters have confirmed is set to continue this year.

The PI squeeze

IFA Cover Story

By Victoria Papandrea

Page 4 of 5

"Based on the current economic and regulatory environment it is our belief that the current national premium pool is inadequate to cover the claims generated by the profession," Clarke says.

"Whilst risks are underwritten and priced on an individual basis, where the premium pool is inadequate, the profession as a whole is likely to experience premium increases to lift that premium pool to a more sustainable level.

"There remains a large number of claim notifications and limited capacity so premiums will continue to rise."

Abbruzzo says those financial planners who have been affected by notifications can expect to see up to a 30 per cent jump in premiums this year.

"The way Dual analyses its portfolio is we basically look at the whole segment, but then our premiums are loaded depending on what area people get involved in, so yes some of these areas that have been affected by notifications certainly will see a 20-30 per cent increase," he says.

For those planners who have not been linked with corporate collapses, he says their premium increases will come from the added coverage of ASIC Regulatory Guide (RG) 126.

"The RG 126 switching covers, which became compulsory from January 1, has certainly put a strain on premiums and added some more costs onto the PI policy," he says.

"So those people are seeing somewhere between a 5-10 per cent increase."

Meanwhile, Green says Vero will continue to set rates at a technical and appropriate level.

"This may be achieved by tightening cover in certain situations. Renewal rate increases vary significantly depending on various factors," he says.

"The largest increases are typically for those with low premiums which are out of step with the market. Increases can range from 10 per cent to over 100 per cent depending on the cover required."

While some larger dealer groups have the scale to manage this extra outlay, the prospect of further premium increases for some individual licensees and smaller planning firms poses a potential survival issue, with some bracing themselves for the possibility of being forced to shut up shop or join a larger licensee.

Tavares observes that some of the PI renewals he worked on in the small to medium-sized planning sector during December last year resulted in hefty increases of between 20-30 per cent. Needless to say, his clients were also shocked at the outcome.

"I think I had to pick them up off the floor. I hate delivering bad news, but there was pretty much nothing we could do and when we went to alternative underwriters, their rates had increased as well or were on par with the increase," he says.

"I think that trend will continue to happen until we get a few more players in the market just to provide us with some alternatives."

For APR, which acts as a specialist broker for a cross section of 70-100 financial planning clients, McPhee expects premiums to increase by up to a quarter.

"In a general brush you could probably say premiums are going up 15-25 per cent, but I would put that caveat depending on the risk profile of the entity," he says.

"The other extreme is, and I won't mention their name, you've got some large financial planners that had exposure to Storm and Westpoint and a number of those groups that have had issues, their premiums have skyrocketed."

However, he also points out that some of his larger financial planning clients that have managed to maintain a good claims history and a long-term relationship with their underwriter have been rewarded with virtually static premium rates.

"For the good, solid long-term clients of the main Lloyds insurer that we deal with, we're able to get rollover premiums, so nil increases, but that's the bigger end where there's a fair bit of premium and also longevity with that particular underwriter," he says.

"I think that's one of the things that financial planners sometimes don't recognise is that if they have a long-term relationship with a particular insurer and it's a good history that they've got, then that in harder times - which I think premium wise we're in at the moment - that should be rewarded."

The PI squeeze

IFA Cover Story

By Victoria Papandrea

Page 5 of 5

McPhee points out that one of his clients, WB Financial, is one dealer group that has enjoyed an exceptional PI track record.

While this mid-sized dealer group has had its PI cover provided by a Lloyds syndicate for the past four years, WB Financial general manager Glenn Pearce says its premiums have remained almost stagnant for two consecutive years.

"We had a 12 per cent increase three years ago which was generally around the time when premiums were going up much more than that, but since then over the last two years our costs have actually been static," Pearce says.

"When we renewed our policy in August last year we were actually quite amazed when the premium came in at only $6.30 more than the previous year."

He says his circumstance does make him feel fortunate considering the excessive premium hikes other financial planners have experienced.

"Absolutely, it's certainly a mixture of luck. It's probably about 20 per cent luck and 80 per cent hard work; when we did first join with Lloyds we spent a lot of time with our submission and it wasn't just about filling out the application; it was a complete dossier on the type of business we do," he says.

 "We segmented how our adviser force deals with our clients, we sent them our processes, and the fact that we're quality assured to the Australian standard I'm sure has a bearing.

"Our submission each year to the underwriter is quite detailed; it's two of those A4 binders thick on our business over the previous year. So I think it's a mixture of luck and a lot of hard work from our perspective to make them as comfortable as possible with the risk they are carrying with us."

However, he adds underwriters have also become less prone to entertain certain terms and conditions within a PI policy.

"When Storm went under all of a sudden there were conditions coming out that restricted access to margin lending, and they were also highly restrictive on if someone recommended a product outside your approved product list inadvertently," he says.

Similarly, Tavares agrees underwriters have also become a lot more stringent in relation to the information they require from the client.

"They're not taking one or two days to basically underwrite the risk, they're taking several days, so they're a lot more cautious in who they provide terms for and there definitely has been some financial planners where they've just turned around and said, 'look sorry, we can't actually provide terms on this type of business'."

While McPhee believes the insurers are steadily building better risk profiles of financial planners, he expects this to become a trend that gains even more momentum.

"The risk profile of financial planners I think over the next couple of years is going to become a bigger buzz word almost where insurers are going to look at what financial planners do, how they approve their investments and how strong their investment committees are," he says.

On the other hand, Green points out the market as a whole is concerned with the trend towards consumer protection that seeks to reimburse lost investments irrespective of the cause of loss. 

"If the government does introduce legislation that requires financial planners to make good losses irrespective of any underlying negligence or dishonesty - as may be the case with the introduction of a fiduciary duty - then further consideration will need to be given as to whether we can continue with offering PI to AFSL [Australian financial services licence] holders," he says.

In the circumstance that one or more of the current PI players do eventually decide to exit the financial planning sector, this poses the question of whether another insurer would actually be brave enough to enter the market any time soon.

While most underwriters would not speculate on what their competitors may or may not be doing, Abbruzzo's outlook on the notion of a new entrant to the market is twofold.

"Do I think there could be another player? Yes there could be but it depends on what approach they take and whether they do it right is going to be the big question," he says.

"This market has got a lot of capacity in it and there might be someone who might want to get involved but it's a difficult market to get involved in at the moment.

"I can understand not entering the market right now because the claims history are increasing and you're picking up a risk from the word go, so anyone moving into the market now would only be picking up the liabilities of someone else instead of walking away from it."