By Peter Conquest & Stephen Gray
In 2021 we wrote an article called “An expert guide to PI insurance for new AFSL applicants”, discussing a significant structural shift across the financial planning industry marked by insurers exiting the market.
Fast forward 2 years, we’re now seeing improving conditions in the PI market for financial planners, with hope that the worst is behind us.
In this article, we explore the reason behind the markets recent challenges, its current improvements, and developments involving existing and new players.
Why has financial planning PI been so difficult in the past few years?
Insurance cycles are driven by existing and forecast underwriting profitability, and capacity. More capacity will come into the market if insurers and their underlying investors believe that there are sufficient returns to be made on their capital.
Around the time of the Global Financial Crisis, we witnessed a number of insurers exit the PI market for financial planners due to its lack of profitability. In particular, some of the lower priced insurers at the time, suffered from an influx of claims as a result of product failures, fraud and over gearing.
The insurers that play at the end of big dealer groups and banks have continued to be hit hard, with AIG being the most recent example, and opting to withdraw cover for financial services firms in 2022.
The past ten years has been a challenging time for financial planners PI for various reasons:
- Some had to find new insurers
- Turnaround times were reduced due to overwhelming submissions to underwriters
- Limited capacity (in terms of limits) was available
- Premium increases were consistent each year
Another contributing factor to the challenging landscape at that time was the withdrawal of capacity by a significant Lloyd’s insurer, which was driven by concerns over the potential repercussions of the royal commission. Whilst the royal commission had its victims, it was predominantly the big banks that got hit hard, leaving independent and boutique advisors largely unaffected.
Why are conditions now improving?
Conditions are now improving as there has been a sustained period of strong profitability for PI insurers of financial planners. The last six years has seen the IFA industry having a pronounced focus on compliance, standards, and education.
It is clearly evident, that AFSLs are now more effectively managed and governed than they were a decade ago. Insurers see a margin to be made, and, in our view, financial planning businesses represent sound PI insurance risks.
What’s happening with the current players in the market?
There are two key factors we’re seeing with the current players:
Increase of capacity and availability of limits from existing insurers.
Previously, securing a $10M limit often meant having to engage two or more insurers to fulfill the requirement. However, the landscape has now evolved, making it easier to get that limit with a single insurer, which is a big advantage for the larger AFSL holders.
Premium rates have flattened.
Two years ago, premium rates were increasing annually by 10-20%. To put this into perspective, if a business had grown by 10%, it could have resulted in an overall premium increase of 20-30% in dollar terms. However, the current trend shows that premium rates have stabilised.
We’ve also observed some instances where insurers have provided rate reductions. This is a strategic move aimed at protecting their market share in anticipation of new entrants.
What is the approach of the new players?
We’re not going to share all our secrets in this article, but there are a few things the new players in the market are looking for.
These new players are actively seeking to price favourable risks at an attractive rate, with the goal of establishing themselves as major contenders in the market.
Currently, there are two new players in the market, and one returning player testing the waters. The two newcomers have distinct approaches. One is concentrating on smaller licensees with a capped $2.5M limit, while the other is aiming at medium-sized licensees, with a higher minimum premium, adopting a more aggressive pricing approach to secure larger licensees.
In addition to the two new and one returning insurer, we are also seeing Lloyds syndicates backing established players with increased capacity. We anticipate this trend will only continue.
What can AFSL holders do to improve their outcomes?
It’s important to note that there’s a pricing band in which insurers will underwrite a financial planning business. You’ll never get a 50% reduction from submitting a really good proposition to an insurer, but you may get a saving that is meaningful in dollar terms.
Here are a few ways for AFSL holders to improve their outcomes:
- Explain the business in a way that’s broader than just the proposal forms, which are quite limited. In particular, how you approach corporate and compliance governance, risk management and client selection.
- Make sure your APL is well thought out, and not overly broad. Explain your investment philosophy and methodology. If you are advising on investments that are up the risk curve, consider giving further detail of your approach to these investments.
- If like many licensees, you have an investment committee that comprises external professionals, provide the detail on who they are and how your investment committee makes decisions.
- Give time to your insurance broker so that they best understand your business and can effectively advocate on your behalf with insurers.
The key message is that there is a lot you can do to demonstrate that your business is well managed and carries relatively low risk, and should therefore be attractive to a PI insurer. Invest the time to construct a thorough proposal and actively engage with your broker in the process.
What do buyers of insurance need to be aware of?
One thing to be aware of, is that not all PI policies are the same. We feel that working with a broker that specialises in PI for financial services firms can provide valuable guidance, empowering you to make a well-informed decision when purchasing insurance.
We’ve identified a particular flaw in the coverage offered by one of the new players, which we’re quite cautious of. Whilst we won’t detail it here, having a broker in this space ensures you receive the necessary education to make the right decision.
Any tips for those getting their own AFS license?
The encouraging news is that securing PI insurance for a new licensee is now a more straightforward process, so there’s no need to stress over the PI component. Most people take the time to prepare for it, and it’s worth noting that the ASIC license application process takes longer than the insurance process. You can engage with a broker early on to familiarise yourself with the necessary requirements.
We have a previous guide full of tips that we wrote back in 2021, which remains highly relevant today – Read it here.
Why work with a specialist?
To secure the right insurance coverage for your business, you require an insurance broker who possesses strong relationships with all the relevant insurers, and the expertise to discern which one is the right fit for your business, as each insurer has its own specific appetite.
We would welcome the opportunity to assist your financial planning business with your insurance requirements. Speak with your broker at PNOinsurance or email pconquest@pno.com.au for more information.
