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Why PI insurance premiums are rising

A lack of underwriting capacity and the new licensing regime have caused professional indemnity premiums to skyrocket for advisers, according to a leading insurance broker. 

Wednesday, May 5th 2021, 6:13AM 6 Comments

Andrew Ford, head of financial and professional risks at Crombie Lockwood, said external global factors and the introduction of the FSLAA regime had caused the issue for brokers.

Advisers report professional indemnity costs of $1,000 to $1,500 under a group FAP, and as high as $4,500 for those with their own FAP licence. 

Ford said: "The whole professional indemnity landscape has been hardening for the past two to three years, driven by poor loss ratios. Lloyd's [of London] syndicators have stopped underwriting over the past 18 months because they don't believe they can return their books to profit. There has been historic under-pricing and increased claims activity."

"The key areas of professional indemnity where premiums have increased are anything in the financial adviser space, including mortgage brokers, and anything construction-related. Those two areas have been hit with 20-40% increases year on year, for the past two years."

The FSLAA regime seems to be a major factor in this market, Ford added. Those without coverage already could find it tough to get coverage, he said.

"The FMA now has considerably more clout in terms of investigating brokers. Insurers are taking a step back increasing prices in many cases. If a mortgage broker doesn't have insurance in place, it will be very difficult for them to provide terms ... Insurers are continuing to push prices up and for risks they are willing to underwrite, they are asking for a lot more information."

Ford said statutory liability insurance, which covers advisers for defence costs for innocent breaches of an act, had also risen.

Amid rising insurance costs, the insurance specialist told advisers, particularly those with their own FAP, to sort their affairs early. 

"My message for brokers would be, think about joining an established network/cluster, with a good reputation and good standing in the market. Also, start negotiations with your broker early on.

He added: "Don't leave your renewals to the last minute, as it is taking insurers a long time to get back to brokers, with everything going up the underwriting hierarchy. If you leave it too late, it's not great for anyone."

Tags: business insurance licensing PI professional indemnity

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Comments from our readers

On 5 May 2021 at 9:05 am John Milner said:
I can only assume any reference to increasing claims are either outside of NZ or are settled privately as I’m not hearing of these through the DRS system. It seems overall NZ has a low claims environment but are been hammered for other countries and their failures.
On 5 May 2021 at 9:53 am Matron said:
From what I've seen and heard so far PI underwriters are using the nice round number method to price premiums.
On 6 May 2021 at 5:31 am Tony Vidler said:
Why do the PI insurers/underwriters not share their apalling NZ claims statistics with the industry? (20-40% price increases in a year to reflect the horrid claims experience must mean there is some data supporting the need for these price hikes surely?)

Let's have some hardball data: premiums gathered...claims made...claims paid...and not just for a 12 month period either; how about over the entire decade of regulated advice in NZ from the apparent 20,000+ advisers who have been operating in the market?

Let's have some evidence on how horrendous the PI book has been in the NZ scene please. Just NZ by the way...most of us don't want to subsidise Australian advisers PI claims.

Everyone in the industry is operating with transparency on pricing and margin now aren't they? Surely that applies to the general insurance world.

If the financial services regulator can provide general guidance on what is fair pricing for consumers in funds management (which I applaud incidentally), then perhaps the regulator can do the same on fair pricing for the consumers (advice businesses) who are being forced contractually to take an insurance policy in order to merely operate?

That would be the same regulator who decided there was no requirement for advice businesses to have those insurance policies mandatorily....
On 6 May 2021 at 6:01 pm JPHale said:
Pretty much what I expected, and that's without the data.

Anyone that has half an idea about the complaints system knows most complaints get settled outside the process.

If you read between the lines, a reasonable portion of the withdrawn DRS claims are settlements. These settlements are confidential in nature, and as a result, they are not reported in any of the typical stats.

The insurer get to vaguely wave their hands about claims experience and the DRS schemes tell us their numbers and no one reports on complaints settled outside the DRS process and call it done... It's BS.

I'm not looking forward to the new landscape of PI, at the same time the process itself could be sharpened up considerably. Yes, I'm talking about more questions. We've had it for life insurance for years, better data equals better decisions, the same needs to be applied here.

We all have vastly different businesses doing different things in different ways and to different standards of risk. This should be reflected in the pricing, even at a group level.

A better understanding of risk should equal better pricing of risk. And no I don't believe that the present approach is sufficient, the present approach is lazy and results in prices blowing out for businesses that should be considered less risky. The present application approach is akin to a rule of thumb, not an investigation.

A change here will mean more work for those involved on the most part they have yet to cotton on to the new rules, let alone make this stretch.

They're still giving advice to life and investment advisers under a wholesale category approach because "they're financial advisers" which is a complete abdication of their responsibilities.

No life adviser I know has been advised they are being treated as a wholesale client, and nor do most life advisers know anything about PI, including me. I know I need it and I take my advice from a general insurance adviser that knows and gives advice on PI.

No wonder it's a bloody mess!


On 7 May 2021 at 9:32 pm w k said:
premium increase should not be unexpected.
- if the insurer anticipate $10m claim a year and there are 10,000 advisers, they each contribute $1k into the pot.
- let's say the number of advisers drop to 7,000 and the anticipated claim is still $10m, they each now have to put $1428.57 into the pot. that's over 40% increase.
- supposing consumers are encouraged to lodge complaints, then it is not unreasonable for insurers to expect higher claims, hence, further premium increases.
i believe that's how it works. maybe an actuary or the insurer can confirm it.

strangely, the "experts" never discuss or forecast the increase workload / possible reduction in income / increase operating costs to advisers. seems advisers' interests / welfare / mental health is non-existent.
On 8 May 2021 at 9:43 am JPHale said:
Good points WK and sounds about right ;)

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Last updated: 2 August 2021 9:09am

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