As seen in the Australian Financial Review
Article By Duncan Hughes
Financial advisers are facing a near-doubling of their professional indemnity (PI) premiums, higher excesses and a ban on the cover for certain types of products because of a surge in negligence claims and the collapse of companies such as Storm Financial.
Insurance brokers warn rates could soar even higher as reinsurers attempt to claw back losses from the spike in claims and weak investment returns by passing on increases during the current round of negotiations.
For many advisers already hit by falling demand for advice and increased regulation, the latest spike in costs was forcing them to quit the industry, contributing to an increase in practices for sale, according to industry experts.
“Many advisers believe they are being unfairly exploited by the insurers who know the regulatory framework makes professional indemnity insurance mandatory,” said Financial Planning Association deputy chief executive Deen Sanders.
Michael Gottlieb, a joint managing director at Mega Capital, a specialist PI insurance broker, added: “Insurers are conscious that claims activity is going to increase and are getting a sufficient premium pool to cover the losses. Very good practices are being tarnished with the same brush as those that have experienced claims activity.”
Insurers had already faced pressures because of the collapse of financial services firms such as Westpoint, Australian Capital Reserve, Fincorp, Lift, MFS and Opes Prime, which was resulting in higher premiums.
But Mr Gottlieb claimed the collapse of Storm Financial Services, which is currently the target of regulatory and criminal investigations, was the “straw that broke the camel’s back”, despite being a comparatively small insurance risk.
Mr Gottlieb said: “With Storm it was the advice, rather than the product, that failed. This is a totally new dynamic for insurers and has scared them. They are thinking if there is one Storm out there, there are probably more.”
It has also led to increased scrutiny by the insurers of advisers offering geared products and margin lending, which can dramatically increase investor losses.
Ironically, creditors of Storm might not be able to make claims on up to $60 million on professional indemnity and other insurance cover because of doubts about whether the financial adviser was technically solvent when the policies were agreed.
Mr Gottlieb said that smaller practices, typically those with annual revenues of less than $250,000, were facing a doubling of their premiums.
American International Group said that larger companies would on average face increases of around 40 per cent to 50 per cent with many facing a doubling of rates and limits on the amount of risk insured.
Other insurers, such as Vero, said there had been “some premium increases of 20 per cent or more” but claimed overall rates were comparable with 2003-04.
Mr Sanders, whose organisation represents about 11,000 of the nation’s 20,000 advisers, added many advisers were currently negotiating with their insurance companies, who were also in talks with their reinsurers in the run up to the end of the financial year.
“It becomes even more difficult and expensive where advisers try to change insurers,” he said. “There is no doubt we are rushing to a very hard market.”
Increased regulatory responsibilities, such as increased liability under the Financial Ombudsman Service’s new dispute resolution system were also adding to costs, according to insurers.
Stephen Prendeville, director of Kenyon Prendeville, a broker of financial services companies, said he currently had 15 financial services businesses for sale, including three forced sales, with annual recurring revenues ranging from $200,000 to $3 million.
Mr Prendeville, who recently completed the sale of Storm Financial Services’ client book, claimed tougher trading conditions and increased regulation were contributing to the recent sales spike.
Major reasons for sale, however, remained generational issues.
KEY POINTS
* Increasing costs mean advisers are selling their practices and quitting the industry.
* Advisers are under increased scrutiny by their insurers
