Let’s lower premiums for the less risky

PROFESSIONAL indemnity insurance premiums have risen dramatically in the financial advisory marketplace, resulting in more costly advice and administration fees for consumers.

However, there is no evidence that the risk profile of individual financial planners and dealer groups is being measured, and the result is an unfair mismatch in current premium pricing.

Many are crying foul about the current state of the professional indemnity insurance market.

Anecdotal evidence, supported by key financial planning and accounting industry associations, suggests the average increase in premiums for independent financial dealer groups is topping 300 per cent, with higher deductibles and additional exclusions.

The recent withdrawal of many professional indemnity insurance providers from the financial advisory marketplace has resulted in a lack of competition and an inefficient market. Insurers argue that rising claims and a deterioration in insurance markets following the events of September 11 are the key drivers behind their withdrawal.

While spiralling premiums in the financial advisory marketplace may not be as striking as the highly publicised medical indemnity and public liability crises, they will nonetheless impact on a large cross-section of the community.

The additional cost of insurance premiums planners have to carry will ultimately be passed on to consumers.

Here is an obvious question. Shouldn’t premiums be scaled according to the risk profile of the dealer groups?

Through statistical analysis and risk assessment, insurance companies attempt to identify pools of policy-holders with similar risk profiles, and then set premiums appropriate to the risk profile of the pool.

In an efficient market, holders of high-risk policies can be expected to make more claims than low-risk clients and so are asked to contribute more to the insurance pool. This is an equitable arrangement for all participants and common practice in most forms of insurance.

The commonly accepted risk measures vary by industry. With life insurance, the key factors are age and sex. With motor vehicles it is the age of drivers, postcode and vehicle type. If your claims experience demonstrates that you are a better than average risk, there is the no claims bonus. Home contents premiums vary by postcode and the insurer’s assessment of the security of the premises.

Where financial planners are concerned what enquiries are made, other than claims history, that would enable insurers to properly assess their risks? Apart from high-level enquiries as to the nature of the services offered, products sold, and the number of planners and clients, the evidence collected is slim.

Insurers accept that a suburban home with locks on all doors and windows and a back-to-base security system is less likely to be broken into than an inner city ground floor apartment with an unlockable sliding door. Why don’t they accept that a dealer group that ensures its planners is competent, compliant and properly supervised, has a lower risk profile than that of a dealer group not developing and implementing stringent training and compliance programs?

Where fact finders are completed, investment advice is consistent with clients’ risk profiles and investment objectives, and appropriate information brochures and disclosure statements are provided (as required by legislation), the professional risks associated with practicing as a planner are minimised.

It is hardly equitable that, where dealer groups are able to clearly demonstrate a proactive stance on competence and compliance, insurers do not acknowledge their lower risk profiles and reward them with lower premiums.

This is not really a novel concept when you consider how inequitable it would be to charge the same insurance premiums for a secure home and a vulnerable inner city apartment.

A tool to enable insurers to underwrite more efficiently, to better price and manage risks and to improve the level of confidence in the preventative management capability of dealer groups would clearly be a valued resource.

So how can an insurer more accurately assess the risk profiles of financial planner and dealer groups? The answer is that groups undergoing regular independent assessment of planners’ competence and compliance, provided by an appropriately accredited organisation, should be considered deserving of lower premiums.

A regular audit of planners’ competence and compliance not only fulfils this requirement but also provides valuable feedback to licensees in managing their professional risks. It also helps answer the often loud critics of the industry who challenge the integrity and professionalism of financial advisers.

Adam Davis is managingdirector of Tribeca Corporation, parent company ofthe IntegraTec Group.