Professional Indemnity Insurance(PI) for IFA’s

The PI market for IFA’s continues to be in a state of Flux. In the last 18 months we have seen three high profile insurers exit the IFA Pi space, being DUAL Australia, Vero and most recently AXIS Speciality Australia (as a consequence of the Axis Australia Branch being closed down), and there has only been one notable entrant in the IFA Pi market being Berkshire Hathaway Speciality.

This movement means the market for IFA PI continues to be tight with the primary players in the space being CHUBB, AIG, SURA Professional risks, Catlin/XL, Berkshire Hathaway, and CGU, with a handful of smaller underwriters who selectively support certain markets.

The exit of DUAL, VERO and AXIS Speciality means a large number of IFA’s need to find a new home, with many former AXIS Speciality clients being marketed well in advance of renewal in order to secure cover. Unfortunately the remaining insurers remain cautious when approached about new risks. Essentially the remaining Insurers are ‘full’ and not actively seeking to grow their IFA book.  In short the state of play is that increasing demand for IFA Professional Indemnity insurance continues to outweigh the reducing supply of IFA Professional Indemnity insurance.

Further compounding the supply issues faced by IFA’s is that Insurers like all other businesses must manage their own risk profile and balance their exposures to any one sector. This creates an unfortunate confluence for IFA’s where many are now looking for a new home and there is little capacity or appetite given the past claims history for the sector as a whole.

Whilst the vast majority of IFA’s run highly professional, well managed and compliant businesses, from an insurance perspective the majority of IFA’s continue to pay for the sins of the minority.

Here is a quick example of how insurers work.

Insurers look at their whole book of business in a sector (in our case the sector is IFA’s) and if they have a portfolio of say $5m of premium across 100 practises it only takes a hand full of claims to potentially wipe out the insurers profit from that portfolio. Insurers must take into account, cost of capital, reinsurance costs, cost of underwriting, administration and broker commissions on the $5m of premium. Insurers typically run to a 60/30/10 rule of thumb – that is, of every $1 in premium, they expect to pay 60c in claims, 30c in costs as outlined above, leaving 10c profit, or in our example $500k in EBIT.

Every year, within a portfolio of 100 IFA risks, 1 or 2 IFA practices will have a $1 million plus claims (negligence or fraud), and another 5 or 6 will have claims of between $100k – $500k.  It takes very little variance in claims profile to exceed the 60% threshold and destroy EBIT.

The unfortunate reality for IFA’s is that because of the sums involved, when errors and omissions occur (even to the most diligent) the size of the claims can be large, hence a relatively small number of claims can have a profound impact on an insurers appetite for new business and also premiums. The past 7 years claims history for the sector have been particularly difficult for insurers however we are seeing a slowdown in large claims which is a positive sign for the future.

What can be done?

The first thing is don’t panic! Quality will always find a home.

What’s important is to appoint a broker that genuinely specialises in IFA Pi insurance. They will know the market, understand which insurers may have an appetite for your type of risk and then position you appropriately so that your firm is presented in the best light possible. A client often only gets one chance to present their business in the best possible light, if this opportunity is missed, then it can be difficult to retrieve your position, and as a consequence your insurance deal will be inferior.  A specialist broker will have deep underwriter relationships and should be able to secure clear results that a general insurance broker (who may have one or two IFA clients) cannot.

If you have made a claim in the past this should not be a reason to think you cannot secure alternative terms. Your broker should be able to articulate to a prospective new insurer what happened in the past, why it happened and what steps were taken in the business to ensure it won’t happen again. Once again ensure your broker is a PI specialist that understands the operational context in which you work as this critical to ensuring your firm is presented in the best possible light at renewal.

In summary Pi for IFA’s remains difficult (but not impossible) to place due to the limited market. Work closely with your broker on renewal and you may be pleasantly surprised.