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It has been confirmed that AIG are to withdraw from the Investment Managers and Financial Planning Professional Indemnity market, advising brokers they are no longer writing new business in these lines and will also be ceasing renewals from September onwards. Pouring fuel on the flame of an already challenging market still recovering from the last round of insurer exists (which caused difficulty obtaining cover and soaring costs), the news of AIG’s withdrawal is sure to set the market back a notch again.

What does AIG’s exit mean?

In an already tight Investment Managers Insurance and Financial Planning PI market, this is bad news. AIG hold a significant premium pool, meaning many fund managers and financial planners will need to find a new insurer. There are already only a handful of genuinely competitive insurers left in this market, some with very restricted risk appetites. AIG’s withdrawal will have several direct impacts which include:

  1. Reduced turn-around times as underwriters are overwhelmed with the additional submissions of businesses searching for a new insurer. This means new licensees or renewals nearing expiry need to get onto their PI submissions earlier than usual.
  2. The limited markets that are left, who have limited capacity available, are going to quickly meet their premium thresholds and not be able to take on any more risk. Some financial services businesses will have a hard time finding insurance if they are currently with AIG as AIG’s competitors may no longer be in a position to write any new business.
  3. With less supply, prices go up. This will mean rate increases and therefore further premium hikes for the years to come for financial services PI policies.

How does restricted “capacity” play out for financial planners’ and fund managers’ PI cover?

Many of the key insurers within this sector are “Underwriting Agents”. That is, they are granted the capacity to underwrite risks, collect premiums and pay claims on behalf of the underlying insurers, often Lloyd’s of London and other mainstream insurers. The underlying insurers manage their exposure by placing parameters around the risks and pricing that can be accepted. Insurers will also protect themselves by limiting “capacity” by using two key methods:

  1. The maximum policy limit that can be offered to any licensee. As an example, one of the more competitive underwriting agencies is currently restricted to a $2.5m limit, which is now inadequate for many AFS Licensee.
  2. The total premium that can be collected annually by the underwriting agency. This is the key area where we see AIG’s exit impacting on all licensees. As an example, Lloyd’s may say to a local underwriting agency that they can underwrite policies that generate up to $10 million in premium per annum. Once this limit is reached, the agency must literally “put down their pen” until the end of the underwriting year which we have seen occur on a regular basis in recent years. So if the underwriting agency has $10m annual capacity and their renewal book is $8 million, then they only have $2 million surplus capacity to take on new policy holders. Or alternatively, they can use this surplus capacity to charge higher premiums to existing clients without taking on new risk. The withdrawal of AIG sees significant demand come into a market where there is capped supply (i.e. capacity).

Who will be affected?

Well balanced and conservative equity, fixed interest, private equity, venture capital, hedge, and infrastructure strategies are a preferred risk by insurers. Established funds with a good track record should be able to find a reasonable alternative solution.

Mortgage funds and other lenders are likely to experience more difficulty in finding an alternative as AIG are not the only insurer exiting this space. The stance from the insurers in the mortgage fund space over the past few years was generally ‘happy to hold existing business, no appetite for new businesses’. With actuaries now getting nervous around the effects of rising interest rates, along with rising building costs squeezing already thin margins in fixed price construction contracts, this stance is now changing, and we have now seen both AIG and Dual exit the sector. Through our discussions we have seen there is very limited appetite outside of these insurers.

Financial planners have not had any new insurers enter the space for some time, so a further insurer exit is not welcome news. The active insurers are clear on their niche and generally not looking to expand their appetite to accommodate those outside of boutique self-licenced firms. The self-licenced firms with a good track record with their existing insurers should be well positioned to maintain cover, however this will likely continue to impact pricing going forward.

Will someone fill the void?

Whilst Lloyd’s recently reported a return to underwriting profitability (See https://pno.com.au/lloyds-of-london-annual-results-and-what-it-means-for-your-business/) , and other signs indicating that underwriting agencies in London are finding fresh capacity, an exit like AIG is a substantial void to fill

What should I do if I am a fund manager or financial planner?

Take your PI submission seriously and cooperate in providing all the relevant risk assessment information to ensure underwriters best understand your business, optimising your chances of maintaining or obtaining new cover. A specialist broker will be able to guide you through this process and it is critical that you engage with them well in advance of your renewal or obtaining your AFSL to make sure you understand your position.

PNOinsurance has assisted many advisors through the process of obtaining PI cover for their new AFS license. We also assist well established firms across financial planning, funds management and corporate advisory. We would welcome the opportunity to assist your financial services business with your insurance requirements.

 

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