Insurer reveals future of the PI industry
Financial advice firms can expect to see a plateau in professional indemnity (PI) insurance costs after years of spikes.
A report by APRA, released on 31 July, found financial planners have seen an average premium increase of at least 40 per cent since 2015. However, APRA notes the average premium rise is accompanied by a large reduction in risk counts.
Jared Timms, partner-financial lines at Howden Broking, said insurers have been looking to implement rate increases of around 10 per cent over the last few years. This is the result of insurers, such as DUAL Australia, Vero and Axis, exiting the market which has led to less competition and insurers being wary of risks in the financial advice space.
“Over the last few years, it turned into a goal of achieving a rate increase of 10 per cent. Coupled with revenue growth, the increase in base premium was quite severe.
“We’re through the worst of it, though I’m seeing a much more defensive stance from PI insurers and rate increases are going out the window,” Timms said in a discussion with Forte Asset Solutions.
“The good news is that, IFAs have been suffering hit after hit in terms of rate increases and that’s starting to plateau.
“We’re not seeing a hugely aggressive stance in terms of rate decreases, but there’s definitely a much more defensive stance in terms of protecting their portfolios and market share.”
He said he felt the increased professionalisation and focus on compliance since the Royal Commission also helped as the matters discussed during the commission made insurers nervous of working with financial advisers and fearful of ‘rogue operators’ causing a large claim.
Making a successful PI submission
When it comes to how firms can improve their submissions when making a PI application, Timms said it is important to highlight the work and effort the firm is putting into its compliance.
“It’s in the best interest of these firms to get their story across in a different way, which could be a meeting or a PowerPoint presentation to sell the story and highlight the firm’s focus on compliance. What is their risk management? Their adoption of technology? Their split between retail and wholesale clients? What products are they recommending and how risky are they?
“Also key is partnering with a specialist broker who knows the space because all insurers have a different risk appetite, so one might be doing things that aren’t within the risk appetite of another.”
Run-off cover
The final issue discussed was the need for run-off cover if a firm wanted to sell its business. Advisers have previously discussed how run-off cover is turning into a significant sum as some licensees are seeking cover for extended periods of time.
Steve Prendeville, director at Forte Asset Solutions which buys and sells financial planning firms, said there is only a need for it to last for one year and it is cost prohibitive for it to be enforced for too long.
“Someone wants it for three years and another wants it for five, but one [year] is sufficient to allow time for clients to be seen and receive a new statement of advice. With that, even if the recommendations maintain the status quo, the buyer becomes responsible for the advice delivered," he said.
“So a run-off of 12 months is sufficient for me, plus you have the additional protection of warranties and indemnities within the contract of sale. It’s cost prohibitive to extend beyond that.
“The average business run-off is around $15,000 for an average business with a $700,000 revenue and if we go beyond one year, it becomes too cost prohibitive and impacts the net result from the vendor’s perspective.”
However, Timms is more cautious and said it will vary depending on a firm's circumstances but that he recommends no less than five years.
AUTHOR
Laura Dew
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So if average PI costs are $15k, what do financial planning dealer groups spend the other $40k they tax their advisers? An anual review, send a monthly/weekly pay cheque and organise a Professional Developement day or 2. What a leech on our industry they are.
You've got wages too. There's the regional manager, with their assistant, and those people report to the State Manager and the assistant to the State manager and their assistant, then there is the assistants to the National Manager and the National Manager. Not to mention an audit team, that audit the advisers and the team that audits those auditors and then the auditors that audit those processes that are required to be followed by the auditors that audit advisers. (all of course they're uncontactable and will ring you back three weeks after the SOA is provided). Now you've also got the Marketing team and the Finance Team and the HR team.
@Nat, 1. average PI premium cost is very different to 15k average cost of 1yr run off cover. 2. Dealer Groups provide a valuable aggregation service that Adviser's may want to pay for. If you pay $40 k pa consider yourself lucky, there are plenty paying well above this rate. Also the skills in the Dealer team help keep dumbass commentators out of trouble by understanding and educating on the basics - like what PI run off is.
@ Nat McIntyre,
First off, running a licence is like and other business.
It's there to run a profitable business for the owners /shareholders, who have put up their own dough to get a licence in the first place.
It's intent is to provide a range of services apart from PI and the ASIC levy that include audits for the advisers and a range of other services like PD days which depending on the numbers come at a cost if you have to fly advisers from interstate.
Putting together PD days even on a quarterly basis requires some planning because responsible Licensee would like to think that their advisers are receiving the kind of relevant information that may or may not enhance their businesses.
Whether or not that happens for you or anyone else in your licence is a judgement call.
If you think this is so easy to manage, why don't you get your own AFS Licence ?