Getting the right professional indemnity cover for the right price is as difficult for advice businesses as it’s ever been, according to a PI expert focused on the advice and wealth industry.
“It’s certainly the most difficult it’s been for the last five or six years,” said Oscar Martinis, senior partner at Mcdougall Kelly & Martinis. Martinis was a panellist at a session entitled The Path to Self-licensing at Tuesday’s Professional Planner Best Practice Forum, moderated by Kon Costas, BT Financial Group’s BT Open head of services.
Not only are insurers providing less coverage, they’ve increased their prices between 10 to 20 per cent in the last year, Martinis noted.
Because major overseas specialist insurers have been suffering significant PI losses in the last 18 months, the effect on the local insurance industry has been that local syndicates have been pulling out or reducing capacity, Martinis pointed out. Where a syndicate might have allowed up to a $20 million policy limit, they’re now providing $5 million policies maximum, he said.
“We have a supply squeeze at the moment, with that supply squeeze, demand is high. Insurers are business people and they are profiteering from it,” Martinis noted.
Martinis and Costas were joined by Ryan Pickles, a previous Count Financial adviser who became self-licensed to start Hamilton Morello, and Mark Bland, a lawyer formerly with ASIC who is a partner with Mills Oakley and specialises in advising Australian Financial Services license applications.
It’s important for advisers and licensees to know what PI insurance covers, Martinis continued.
PI covers breach of professional duty or breaches of duty of care to your clients, he explained, but it does not cover fee disputes. Fee for no service, for instance, is a commercial dispute between clients and advisers.
“It covers fraud and dishonesty. It doesn’t cover the person responsible for the fraud, it covers the business,” he said. An example of a breach of duty of care covered by PI could include the result of an error in a financial needs analysis or an accidental sale of a quantity of shares, Martinis explained.
To determine the cost of a policy PI insurers will consider a number of factors, including the last three years of complaints register, the most recent compliance audit, Financial Services Guides and Statements of Advice, investment committee policies and procedures as well as the detail of those procedures.
“The tighter these documents and procedures are, the better rate you can get,” Martinis said.
Securing PI insurance for the right price might be a challenge across the advice industry, but it’s an even bigger challenge for those within dealer group structures, Martinis continued.
“Insurers don’t like dealer groups,” he said. “It’s very hard to manage and control 100-200 ARs, whereas insurers clearly understand that for those who are self-licensed it’s your AFSL and credibility is important and while accidents happen, the larger and more systemic claims – fraud and dishonesty –seem to come more from the dealer groups,” Martinis noted.