Simple steps taken to document processes and business history can significantly improve an independent financial advice (IFA) firm’s ability to obtain the most appropriate and cost-effective professional indemnity (PI) insurance.

Oscar Martinis, a senior partner in the insurance broking firm McDougall Kelly & Martinis, says arranging PI cover effectively requires effective communication with underwriters.

“When you put PI cover together, you’ve got a proposal form, and if all the IFA is doing is filling out the proposal form, providing the basic supporting documentation, you’re going to get what you get,” Martinis says.

“Whereas, if you put together a pitch or a submission to an underwriter, and you actually sell that client into the underwriter, then you get the result you want.

“A really good example is a firm that has been though a couple of cycles. It was right up at about $1 billion of FUM; they had six or seven authorised representatives [ARs] at one stage. They got rid of those ARs during the global financial crisis and got back to a couple of hundred million dollars FUM. They’re really tight now, a really clean approved product list, and three advisers in the office – but they were paying $75,000 [in annual premiums]. That’s a lot of money.

“I said, I know your business. I’ve dealt with you over the journey when I was in funds management, and you shouldn’t be paying this much. I need you to write me a one-page historical view of the ebbs and flows of the business.

“Anyway, we did it for $38,000 – effectively half price.”

Martinis is a former managing director of HFA Asset Management. He left HFA in 2010 and created SMART Business Insurance, before forming Absolute Risk Advisers in 2013. ARA merged last month with Consult Insurance Solutions to form McDougall Kelly & Martinis.

Understanding the ins and outs

Martinis says the secret to arranging effective PI cover lies in understanding the ins and outs of the advice business in question, and matching it with the most appropriate underwriter.

“If I was an IFA and I had a general insurance broker doing my PI, I’d be moving on,” Martinis says.

“You need to understand the operational context in which the IFA works, in order to place the business. Then you need to know who’s who in the zoo: which underwriters to use, when. Some underwriters won’t touch you if you’re using a managed discretionary account. They just won’t cover it. It’s their choice – they rate the risk and they say no. Others will.

“So an IFA using a suburban general insurance broker to put through his PI, he really needs to consider that, and find a specialist.”

Martinis says movements among the underwriters have complicated the PI insurance picture.

“In the past 18 months we’ve seen Dual Australia pull out, we’ve seen Vero pull out, and now we’ve seen Axis pull out,” he says.

“That would be at least 25 per cent of the market. So all that capacity has to be sucked up by the remaining players, and their books are fairly full. They’re being very selective about who they take on, and how they take them on.

“Who’s left in the market? You’ve got Chubb, AIG, Berkshire Hathaway is a new entrant, Sura [Professional Risks], XL Catlin and CGU – they are probably the six [biggest]. In traditional insurance you might have 20 insurers or underwriters to go to, but in financial planner PI you’ve got half a dozen.”

Martinis says the PI market is tight, but there’s emerging evidence that the underwriters’ claims experience is improving which may act as a brake in rising premiums.

He says underwriters operate on a 60:30:10 model – for every dollar of premium income they receive, they expect to pay out 60c in claims, 30c in costs, and book a profit of 10c.

“There’s not a lot of margin in it, and because there’ve been so many IFA claims, some of these underwriters have been running at a loss on their books – running a 130 per cent claims ratio,” he says.

“That’s why we’ve seen a rapid and rampant rise in the cost of financial planner PI in the past five years. But it is slowing.”

Join the discussion