PII
COVER businesses, and in employing risk management procedures such as Accredited firms - will enable insurers to identify risk more readily. That will make it easier for them to risk-profile and rate the business accordingly against other businesses.” This enhanced risk profiling of business practice is also reflected in the fact that businesses making claims involving risk-rated multi-asset funds by the Tenet network can qualify for sharply reduced excesses. Tenet provides cover through Paragon Insurance, its Guernsey-based captive insurer.
Network Envy Amongst the networks, however, there is still no single response to the PII situation which is hardly surprising, as not everyone agrees on the exact nature of that situation. At one end of the scale is Positive Solution chief executive officer Richard Pearson’s phlegmatic reasoning that he has been in the business for 28 years and witnessed many cycles in PII cover; at the other is SBG’s George Higginson, who presents a more apocalyptic vision. Pearson says that the backing of Aegon and strong risk controls provides some insulation for his network - but that “even so, we too have seen costs rise.” And Higginson says that Hanover, SBG’s PII underwriter, pulled right out of cover for IFAs in February 2012 forcing the group to secure alterative cover through a combination of a Lloyd’s syndicate deal and self-insurance. Pearson says that he is bemused at the attitude of the
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FSA towards PII insurers, as revealed in the letter sent to them by Clive Adamson, director of supervision of the regulator’s conduct business unit, regarding cover for firms which sold Arch Cru funds. He claims that this letter “indicated that [the FSA] had been taken by surprise by the insurers’ reaction in not wanting to underwrite this type of business. But it is up to underwriters to make that call.”
A Hole in My Business Higginson agrees about the troubled state of the current market. “Where cover is provided, it is not unusual to find that the premium has doubled, terms have tightened, and there is a rise in excesses. To take one example, an adviser looking to join us came to us and said that his premium had risen to £100,000 a year with a £50,000 excess on every claim.” And that’s enough to blow a hole in the basic economics of the situation. “There do not have to be a lot of claims for a large amount to become due,” he says. “We have done some work on this and we found that for a £1 million investment we make circa £10,000 and the adviser £40,000 (=£50,000 in total) which is very small when you compare that to the potential liability and the associated costs, such as PII cover.” Higginson explains the logic of the situation: “Imagine if SBG was not here – and we are circa 25% of the market, after all. This would mean that the FSCS would have to pick up the bill. What would happen to all the remaining advisers in the market if we were not here? It would mean that they would have to pick up the bill instead.”
The situation regarding PII reflects a form of fiscal drag operating within financial services precisely because of the chosen method of obtaining money to compensate consumers for miss-selling, fraud and the risk of final salary pension schemes going under. In the latter case, there is the pension protection fund which imposes financial strains on well-run schemes by imposing a levy on them to pay for badly-run ones. Similarly, the FSCS demands a levy from existing, presumably well-run IFAs to pay compensation for the actions of defunct, badly run ones. Of course, these same firms bear the brunt of understandable reluctance amongst underwriters to accept their PI business on anything except punitive terms.
Sympathy For The Devil? But if you’re thinking that the insurance industry is a villain of the piece, perhaps we should remember that underwriters too can hardly be blamed for avoiding a sector which may still contain claims relating to toxic ‘assets’ whose nature has yet to become apparent? That fiscal drag may ultimately result in whole-ofmarket independent advice becoming the sole preserve of the top 10% or so. Leaving highly restricted advice or direct sales for the bulk of the population, and the Citizens Advice Bureaux to mop up the difference elsewhere. For more comment and related articles visit...
IFAmagazine.com
November 2012
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