Article from the AFR
Written by: Annabel Hepworth and Duncan Hughes
Businesses are facing double-digit increases in professional indemnity insurance premiums because of a surge in negligence claims triggered by the global financial crisis and collapse of financial advisory firms.
Insurance brokers said sectors with higher incidences of negligence claims – such as mortgage brokers, financial planners, property valuers, architects, engineers and others in construction – could be hit by premium rises of up to 10 per cent, as well as more restrictive cover.
As concerns mount that insurance is more expensive and difficult to obtain, the Australian Securities and Investments Commission has said it will review its policy on what is “adequate” indemnity cover for financial planners and other licensed financial services providers.
ASIC deputy chairman Jeremy Cooper said there were suggestions the global financial crisis and high-profile financial services collapses could “make insurers more wary about writing these sorts of cover”.
His comments come amid a hardening insurance market, with the major insurers – QBE, IAG and Suncorp – having indicated there is pressure on premiums in a range of insurance classes as risk is reassessed.
Aon Risk Services Australia’s general manager of market services, Ross Castle, said several professions with exposure to the impact of the global financial crisis faced a “dramatically” worsened situation.
“The risk profile as we are seeing it for those in the financial services sector, particularly financial advisers, has changed dramatically,” Mr Castle said.
The ASIC policy about what is “adequate” personal indemnity insurance was introduced last year because of new Corporations Act requirements making it compulsory for licensed financial services companies to have it. The law changes followed the 2005 collapse of the Westpoint property empire that left about 4000 investors facing losses.
Mr Cooper said ASIC was signalling with its review that “we understand what some of the forces are and we’re watching what happens”.
“We are always open to discussions with the industry as a whole or with people who for one reason or another are finding it difficult to get insurance,” he said.
AON’s Mr Castle said that while the weak economy was the primary driver, increased scrutiny from consumers and regulators, would have a significant impact on claims against financial services firms.
” We are already starting to see a number of potential claims circumstances coming through. All of this requires investigation and costs being incurred even before any determination on the merits of the claim. Undoubtedly, some of these matters may well result in paid claims.”
He said that potential claimants had much greater access to compensation through dispute-resolution schemes and class actions backed by litigation funders.
Insurers had already faced pressures because of the collapse of financial services firms such as Westpoint, Australian Capital Reserve, Fincorp, Lift, MFS, Opes Prime and Storm Financial, which was resulting in higher premiums, he said.
Directors’ insurer AIG this week settled a damages claim against the directors of collapsed goldminer Sons of Gwalia for the $50 million maximum amount of the policy plus a $3 million contribution by directors.
Mr Castle said the higher premiums extended beyond financial services. “We are also seeing other professions including property valuers, mortgage brokers and construction professionals such as engineers, architects and surveyors being impacted by the economic climate. It will be those businesses and sectors that are most susceptible to the slowing economy that are likely to be most affected.”
He said that the main professional indemnity insurers were pushing for premium increases in many of these sectors and that these increases were generally in the single digit, typically around the 7.5 per cent range, but this could be higher for areas considered higher risk.
He expected that insurers would harden their resolve to push through even higher increases as the year went on.
The financial services sector is expected to face the biggest rises.
Experts said claims of negligence tended to happen in a downturn as there was greater scrutiny of losses.
Professional risk insurance specialist MEGA Capital expects the cost of mandatory professional indemnity for financial planners to increase by up to 30 per cent over the coming 12 months amid rising claims.
Costs for a single operator will range from a minimum of $5000 to about $7000 while dealer groups with $10 million annual revenue are expected to pay premiums of some $150,000 to $200,000.
Excesses are also expected to rise, with insurers expected to take a hard line in current negotiations.
Insurance companies – already reeling from a calamitous fall in investment returns because of the global financial crisis – are concerned they face greater risks from the financial services sector because of corporate collapses and investor actions against advisers.
Insurance concerns have been heightened by the role of advisers in the collapse of Westpoint and Storm Financial Services.
Some financial advisers facing legal action from investors for alleged negligent investment advice are increasingly likely to use their professional indemnity to make a payment, rather than face protracted legal action, according to senior advisers.
In some cases, advisers defending an action are also taking the route of calling on their professional indemnity insurance because of concerns that an unsuccessful legal defence against a client could provide their regulator, ASIC, with evidence for an additional action.
Clive Bowman, executive manager of IMF, which has funded litigation cases ranging from Westpoint to Opes Prime, said: “There is obviously a focus on the financial sector for legal action. But there has to be a capacity to pay, which means either a wealthy individual or insurance.”
Peter Johnston, executive director of the Association of Independently Owned Financial Advisers, which has about 2200 members, said: “Smaller members are finding it increasing difficult because they are having to find $5000 or $7000 a year on top of other costs. It is forcing many of them to join bank-owned distribution networks.”
However, Financial Planning Association chief Jo-Anne Bloch, which has about 12,000 members, is sceptical about what underwriters are saying, arguing they are trying to prepare the market for higher premiums so it will not be controversial when announced. “At this stage, they are speculating because premiums have not gone up. The only criteria for rises is the risk of the individual assessment. To speculate about a rise and then apply that to individual companies is a big leap,” she said.
But Mega Capital director Michael Gottlieb said: “This is not speculation. Anyone getting a renewal notice will tell you it is going up.”
Susan Heron, chief executive of the Australian Institute of Management, said that small to medium enterprises could be badly affected. “Such an increase will surprise many companies and for some SMEs, already being squeezed by the credit crisis, the prospect of further cost pressures is most unwelcome,” she said.
“SMEs will view a cost rise as yet another hit to their ability to compete with larger, better-resourced organisations,” she said.
Exacerbating the situation is a withdrawal of some capacity by insurers. In 2006, QBE stopped providing professional indemnity insurance to financial planners, stockbrokers and other financial advisers considered high risk.
“Essentially, we saw that there was an increase in the potential for substantial losses coming through those sectors in the main because you had class-action lawyers gearing up, class-action funders gearing up and we saw exposure exploding. We couldn’t measure it and if you can’t measure it, you can’t price it, so we decided to withdraw from those segments,” QBE’s chief executive officer, Terry Ibbotson, said.
Further, financial planners fear another blow-out in their professional indemnity insurance costs because of a proposal by ASIC to almost double the cap on compensation that financial services providers can be forced to pay to aggrieved consumers under dispute-resolution systems.
The FPA is demanding that ASIC guarantee the affordability and availability of the insurance before increasing the cap. It has also warned that ASIC’s proposal could force small businesses in the sector to shut down.
The external dispute resolution (EDR) systems – which ASIC requires financial services businesses that deal with retail clients to belong to – are an alternative to the courts.
ASIC has said it was proposing the increases in order to ensure that the compensation available in the systems was adequate and to stem the flow of court cases arising from this year’s corporate collapses.
Caption:
PHOTO: ASIC deputy chairman Jeremy Cooper . . . ‘we understand what some of the forces are’. Photo: JESSICA SHAPIRO
