Tailoring the right approach

Insurance giant American International Group (AIG) has been the dominant force in the provision of professional indemnity (PI) insurance to financial planners for the past five years.

AIG has again emerged as the leading PI provider in 2007, with the company attributing its dominance to its tailored approach.

In 2007, the Top 100 research reveals the following breakdown of the PI market for dealer groups: AIG, 26 per cent; QBEInsurance Group, 19 per cent; Allianz Insurance, 13 per cent; CGU Insurance, 9 per cent; Lloyd’s of London, 6 per cent; and Aon Australia, 6 per cent.

Looking at the statistics for the past five years, not much has changed in terms of placement, at least for the top three companies.

AIG is noteworthy for not only remaining the most popular insurer for five years straight, but also leading by a significant majority. For instance, in 2007, of the Top 100 dealer groups, 14 were insured by AIG, with the runner up being QBE on 12. In 2006, AIG had insured 18, with Allianz a distant second with nine. Other insurers that have occupied the top spot have been QBE, Allianz, CGU, Aon and Dexta.

Professional indemnity manager at AIG John Jousif believes that when determining what protection is required for a company it is crucial to tailor coverage and endorsements within the insurance contract.

“AIG offers a tailored and specific PI policy for principal members of the Financial Planning Association (FPA). The wording provides flexibility of cover for our policyholders when dealing with such issues as authorised reps giving advice on financial products not on the approved products list.”

According to Jousif, the financial strength of an insurer is a major consideration for potential clients when making a decision.

The international firm has over “US$900 billion in assets and over US$80 billion in shareholders equity. And it operates in more than 130 countries and retains over 100,000 employees worldwide”.

Insurance firm Allianz has also frequented the top three.

Financial lines manager for Allianz, Clinton Ruddock, offered similar sentiments on the importance of a tailored policy.

“We visit the larger insureds with the broker to assess corporate governance, training procedures, IT systems and controls and products offered. We understand that the insured’s reputation is critical and claims need to be swiftly finalised. If this doesn’t occur, claims costs can steeply rise, especially if it involves financial loss relating to the market changes,” he said.

The national manager, professional and consumer services, at insurance brokerage firm AON, Robert DiPasquale, emphasised the education of insureds above all else. He said underwriters needed to understand where their customers are coming from and keep abreast of industry news and trends.

“Keeping clients informed of the insurance market and the global position of AON is now just as important, if not more important than the ability to arrange insurance,” he said.

The processes of starting insurance claims can be very traumatic for the client. As such, a good insurer will be able to empathise with the client, DiPasquale said. “When there is a need to make a claim against an insurance policy we have specialist claims staff that assist clients through the traumatic process. We want our clients to have, as much as possible, an experience which allows them to continue concentrating on their business while we negotiate and administer the claim on their behalf.”

The rankings of the top PI insurers for the last five years show retention levels have remained relatively stable. Jousif attributed AIG’s success to its strong industry affiliations with the FPA.

“For the past two years, and again this year in Sydney, we will have a stand at the FPA’s National Conference where financial planners can meet some of our underwriters and ask them direct questions. AIG Australia’s approach is to partner with our insured’s. And so, despite the soft market conditions, we’ve maintained strong retention rates,” he said.

This was also echoed by DiPasquale. “We’re keen for the insurer to know the client and the business being insured. Our experience is that comfort and understanding grows with the insurer meeting and understanding the client. Also, there is comfort on the part of the client in knowing the insurer.”

To help differentiate themselves from competitors, Ruddock also believes it’s important to be selective and maintain close relationships with quality dealer groups.

“We actually target dealer groups that have sufficient fee income (usually above $6 million) and resources to provide research-backed advice and institutionally-linked systems and products. It is an onerous task to provide sound financial advice considering all the permutations involved across law and accounting.”

Most recently, PI insurance made the news when MoneyManagement reported that QBE insurance had told underwriters that it had ceased to offer PI insurance to financial planners as a reaction to Australian Capital Reserve’s (ACR) folding last month.

Ever since the collapse of HIH, a company notorious for undercutting its competitors, in 2002, the number of insurers willing to provide PI insurance to advisers declined sharply, while premiums rose exponentially. Added with the drafting of mandatory PI regulations, this could spell disaster for many smaller financial planning firms.

“The recent experience of Westpoint and, to a lesser degree, Fincorp and ACR, has highlighted that the need for PI insurance has never been higher. Without the right insurance, licensees are putting their business and personal assets at risk,” Jousif said.

Ruddock agreed. “I would be for the mandatory provisions. It’s a very broad profession and the training requirements are a great step forward.”

As for the increasing costs of premiums, “For insureds with a sound historical record there is certainly no direct trend showing increased rates proportional to fees currently”, Ruddock said.

Consequently, insurers are a lot more selective in who they will insure. It’s now common practice for insurers to have a clause in the policy excluding margin lending. AIG, on the other hand, said that as long as certain benchmarks were passed it would not necessarily exclude providing protection in areas such as margin lending and tax-effective schemes.

“We don’t shy away from licensees or dealer groups that deal in what we consider more specialised financial products such as direct shares, margin lending, hedge funds, unlisted securities and investments in a single underlying asset or debt instrument,” Jousif said.

Despite this, as the survey showed, the number of insurers willing to provide PI to financial advisers has been steadily increasing. DiPasquale believes that in the last three years the PI sector has expanded significantly. “For a few years clients were having difficulty in obtaining suitable insurance at a fair cost. But the tide has turned. The financial services industry must continue the path it has undertaken in the past 15 years to develop and educate the profession.”

Jousif has also noted the pick-up in the last three years. “AIG Australia remains committed to the financial planning PI market. At present, due to the recent influx of capital into the insurance market, there may be an abundant supply of PI insurers. The issue for licensees is how long will this new capital last?”