In defence of professional indemnity insurance



Insurance markets do not lie, they reflect perceived risk. The cost of professional indemnity insurance for IFAs is rocketing (I know – I’ve been quoted). This is as a result of increased perceived risk of claims against insurance from those who consider they have been ill-advised to transfer and ill advised as to what to transfer to.

IFAs may consider such premium hikes punitive and to some extent they are. The collective failure to police the behaviour of the advisers against whom claims are now being made is now being punished by insurers who feel let down by the “professions”.

Keith Richards has written in Money Marketing suggesting that PI could be provided through the Government levy, effectively extending FSCS cover.

This is a sound way of insuring the public sector but a lousy way to deliver the competition that the PFS prizes. In a competitive market, advisers should be competing on the basis of their track record, those who have a poor track record find themselves at a competitive disadvantage. That is what underwriting does – insurance markets do not lie.

A levy which spreads the cost of insurance beyond those who are insured is asking for the king of behaviours that insurers are keen to stop. It effectively creates moral hazard, reduces competition and encourages the sloppy behaviour that caused the PI problem in the first place

If IFAs are serious about being part of a profession, they need to arrange their own professional indemnity insurance and ensure that the underwriting properly reflects risk.

What is the “pension transfer market”?

The article by Keith Richards makes the following statement

“Sadly, reports show that more firms are exiting the pension transfers market”.

Again I am confused by what the PFS is referring to. If IFAs form a profession, then the last way they should be talking about advice about DB transfers is in terms of a “market”.

If the PFS are representing vertically integrated wealth managers, then a “transfer market” makes some sense in terms of competition for new business.

My understanding is that PFS stands for advice rather than wealth management but it is unclear from the language of the article whether PFS is lobbying for better advice or more wealth to advise on. IF the main source of wealth to fuel the competition that the PFS desire, comes from DB transfers, I think the PFS are hopelessly compromised.

There should be no market for DB pension transfer advice.

Professional indemnity insurance is the market regulator

I have said that PI will catch up with IFAs since I spent time with the steelworkers.

Two years on from “Time to Choose”, it has.

The insurance market is reactive not proactive, the FCA needed to be proactive and they were found lacking. PI is the second line of defence and it is an effective one.

To dismantle that line and replace it with what is effectively social insurance, is to transfer risks that should be born by individual IFA firms onto the industry as a whole.

Since the costs of levies are inevitably passed on to customers, the impact of reducing PI and increasing the levy would be to spread the cost of mis-selling to all customers in the interests of protecting firms which otherwise would have gone-under.

I don’t see this as competitive or in the interests of the general consumer. I simply see it as special pleading from a very profitable part of the financial community.



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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