Advice businesses which heavily recommend direct equities, property, structured products and Managed Discretionary Accounts (MDA) could face hefty premium increases for professional indemnity insurance at time of renewal, warns Australia’s largest financial planning risk insurance broker.
According to Mega Capital director Michael Gottlieb, the number of PI insurers who are prepared to cover advisers who recommend these types of investments has shrunk while those who still play in that space are lifting their premiums.
“There’s a significantly reduced appetite for financial planning firms with business models and investment philosophies that the insurer regards as high risk,” he said.
“The result is that financial planners who run these types of businesses have fewer options and less choice in terms of PI insurer.”
Financial planner James Walker-Powell, principal of More4Life Financial Services on Sydney’s Northern Beaches, paid $17,000 for PI cover last year but stands to fork out $26,000 for the same level of cover in 2014.
More4Life Financial Services is self-licensed and offers a limited MDA service to its 120 clients.
“The quotes we’ve received for PI cover is close to $10,000 more than we paid last year,” Walker-Powell said.
“We are a single adviser and single paraplanner business with no material claims history but with some providers exiting this space, our premiums will go up.”
On the other hand, Gottlieb said advisers with good claims history and a vanilla investment approach were considered to be “preferred risks” by the insurers and could easily secure the same level of cover at similar premiums.
“Firms that are considered low risk can achieve attractive renewal rates with no increase from last year while those with material claims history and investment strategies that are seen as high risk will see premiums rise as insurers shy away from those areas,” he said.
“A few years ago, insurers were concerned about firms that had exposure to margin lending and structured products but now the key spots are around MDAs, direct equities and the ability of a group to supervise its advisers. It is surprising that direct equities are in that category because most investors and advisers don’t consider that strategy to be high risk.”
Gottlieb said the number of claims made against financial planners had dropped in the last 12 months, which had made the 2013 renewal period much “easier” to manage than in 2012 and 2011 when investors were still reeling from losses related to the Global Financial Crisis.
He said on average firms paid around 2 per cent of revenue in PI premiums in 2013, which had been consistent for the last 18 months.
“PI premiums are calculated as a percentage of revenue with loading and discount factors depending on whether the business is considered a high or low risk,” he said.
“The vast majority of advisers pay between 1 and 4 per cent of revenue in PI premiums, with the average around 2 per cent. The percentage will be closer to 4 per cent for firms that are considered a high risk, and 1 per cent for firms that are considered a low risk.”
