Easing the PI headache

While the industry has moved towards a fresh vision of professionalism and an exciting evolution in business models, it's still, unfortunately, being hamstrung by a professional indemnity (PI) market that seems to be in a holding pattern. In a recent blog for ifa, Oscar Martinis, senior partner at McDougall Kelly & Martinis, said that for non-aligned financial advisers the PI market continues to be "tight".

He wrote that over the past year and a half, three large insurers (Dual Australia, Vero and Axis Specialty Australia) have exited the IFA PI space, with only one insurer (Berkshire Hathaway Specialty) diving into this somewhat murky market.

"The exit of Dual, Vero and Axis Specialty means a large number of IFAs need to find a new home, with many former Axis Specialty clients being marketed well in advance of renewal in order to secure cover," Mr Martinis wrote.

"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 PI insurance continues to outweigh the reducing supply of IFA PI insurance."

Despite this less-than-stellar appraisal, the corporate regulator has been assuring IFAs there's nothing to worry about; in effect, "nothing to see here".

Late last year ASIC released a report, assuring advisers the situation is "stable and generally available", minus some insurance policies that do not meet the requirements of RG146.

"We found that, like most areas of insurance, PI insurance is cyclical with reduced market capacity and significant premium increases in periods where insurers suffer poor profit ratios," the report said.

The review was carried out between November 2014 and June 2015, after licensees raised concerns they couldn't get their PI coverage for a price they could afford.

And some in the industry are on board with the regulator's findings.

Daniel Waters, general manager of professional services at provider of PI services for advisers Strathearn Insurance Brokers, told ifa in October last year that despite some exits there were still a good number of options for IFAs.

"[For example,] Allianz is quoting financial advisers, AIG is quoting financial advisers, Chubb can quote certain financial advisers, there is Newline, which is a Lloyds-based company operating in Australia, and XL Catlin can write financial advisers," Mr Waters said.

However, for many on the ground, PI continues to be a headache.

Boutique Financial Planners (BFP) president Dacian Moses told ifa that finding affordable PI cover remains a problem due to a lack of market competition.

"I think the PI market is dysfunctional," he said. "There are only three or four players in the market, and it's essentially an oligopoly and they will charge what they can get away with. What we need is more competition and more expertise in the underwriting departments in assessing risk."

So what's an IFA to do?

For some advisers a creative solution is needed.

AIOFP executive director Peter Johnston is one proponent of a means-tested compensation scheme of last resort for consumers who have been affected by financial misconduct, which he says would have a direct impact on PI costs.

And it seems the government is listening.

At last year's AIOFP conference in Queensland, Labor senator Sam Dastyari said the government should consider funding such a scheme.

"If it's done the right way, it puts an incredible amount of downward pressure on indemnity insurance. It gives people a level of confidence and the industry a level of confidence [so] that you can actually be pushing towards more people getting more financial advice," he said.

"You have a situation where planners are the public face of what is going on, they have been held responsible for things that are not their fault. You don't want a situation where small to medium [sized] businesses and other independent financial advisers end up being driven out of the system."

But for now, advisers may need to be more pragmatic.

Mr Martinis says advisers shouldn't panic: "Quality will always find a home," he wrote. He also says advisers should approach an insurance broker who is a genuine IFA PI specialist.

"In summary, PI for IFAs 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," he said.

Alice Uribe, ifa editor