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Professional indemnity insurers rein in on risky IFA business

by Michelle Abrego on Jan 13, 2012 at 11:07

The fallout from recent investment failures has resulted in professional indemnity insurers placing curbs on the cover they offer IFAs and even shunning their business altogether

Advisers have been warned the bill resulting from the collapse of Keydata and the failure of the Arch Cru funds could stretch beyond punishing Financial Services Compensation Scheme (FSCS) levies to include hikes in professional indemnity (PI) insurance premiums.

The FSCS’s recent decision to employ solicitors Herbert Smith to pursue around 500 advice firms which sold SLS-backed Keydata products lies at the heart of a potential price hike by PI insurers.

Insurers have reacted swiftly to the action, which is understood to mark only the start of the FSCS’s attempt to recoup compensation paid to Keydata investors. Some have pointed to exclusions that mean they will not pay out for such cases, while others have stopped writing new IFA business altogether.

Exclusions highlighted

A letter seen by New Model Adviser® from a PI insurer to its adviser client highlighted the exclusions that exist in policies and how advisers may not be covered for certain sales, such as those of Keydata products or Arch Cru funds, and for costs relating to the FSCS’s legal pursuit. It states that exclusions related

to life settlement funds and insolvency mean it would not pay out if the FSCS’s claim against the IFA was successful.

‘It is clear that at the very least, SLS’s insolvency gave rise to the claims made by FSCS; it therefore follows that the insolvency exclusion also excludes the claim being made,’ the letter states. ‘Given the circumstances, we have no doubt that these exclusions apply and therefore the claims made by Herbert Smith on behalf of the FSCS are not covered pursuant to the terms and conditions of the policy referred to above. We appreciate that this must be disappointing to you, but the exclusions clearly apply on this occasion.’

Some PI insurers, such as QBE Insurance Group, have gone further, deciding to stop writing new IFA business.

Neil Pointon (pictured), director of retail at brokers Howden Insurance, said difficult economic conditions and the impact of failed investments were combining to affect the cover PI insurers were offering IFAs. ‘We might be on the brink of a hardening market,’ he said.

Changes in the small print

Keith Churchouse, director of Guildford-based Chapters Financial, said although PI premiums had not increased dramatically over the past few years, providers had started to add more exclusions and caveats to policies.

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7 comments so far. Why not have your say?

Who said "I have a dream"?

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more nails in the IFA coffin!

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Relentless....!!!!!

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The following question should be part of the Level 4 exams.

Q - When is insurance not insurance?

A - When it's PI Insurance of course.

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An IFA's PI insurance is not meant to cover product failure it is the product provider and their PI cover that is meant to put that right. Though I doubt that the product providers PI cover will pay out on some of the recent product failures where fraud and misappropriation of client funds has occurred at provider level.

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RV - Get your compensation PDQ

NK - What is the point of insurance that has so many exclusion clauses? When you compare the Meerkat with open eyes you see how some insurers are taking the Mickey.

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Julian Stevens

Jan 14, 2012 at 12:58

"‘They haven’t come back and said “you’re at risk for these” or “you’re not covered for this” or anything like that. As far as I’m concerned that’s it."

Gordon Bennett! Rather than just putting away your PII file and hoping for the best, Mr Schwer, might it not be a good to read for yourself every line of the policy to see exactly what nasty little exclusions and restrictions may have been quietly inserted without having been drawn to your attention?

Thankfully, we've no exposure either to KeyData or ArchCru, though pretty soon I can see PII premiums going up still further, claim excesses increasing and more and more restrictions and exclusions being included in the policy wordings. Eventually, the range of products covered will have become so limited, the standards of due diligence so onerous and the standards of comprehensiveness required for our letters of recommendation so stringent that it'll have become all but impossible to recommend anything but the most basic range of product solutions to just about anybody, whilst writing up everything to adequate standards of compliance will take even longer than it does now.

Meanwhile, the FSA will continue to fail to identify approaching train wrecks, even when it has in its possession information on which it ought to take action (no explanation has been given as to why the FSA failed to act on the findings of its 2007 arrow visit to KeyData) and, somehow or other, every provider that fails will, somehow or other, be classified as an intermediary so that the costs of the fallout can be dumped on the IFA sector. No explanation has been provided as to just HOW the failure of an intermediary can result in losses to clients, given that all monies en route to any provider are, by law, required to be held in a client money account entirely separate from the affairs of the intermediary company itself.

And, in addition to increasing PII premiums in return for less and less comprehensive cover, all our regulatory levies continue to go up and up and up ~ presently four tiers plus occasional special additional levies imposed by the FSCS. Oh yes ~ business isn't exactly booming right now either, in no small measure due to the state of so many banks that should have but, by the FSA's own admission, weren't subjected to appropriate or remotely adequate levels of regulatory supervision.

Yet, despite all this, Hector Sants would have us believe that the FSA has no prejudicial agenda against IFA's. The facts suggest otherwise.

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