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PI insurance costs soar

NZFSG advisers face professional indemnity insurance costs of $2,500-$4,100 each in the next year, as premiums soar under the new regulatory regime. 

Friday, June 4th 2021, 8:58AM 7 Comments

The dealer group has sent out 2021/22 PI renewals for members, with insurance costs "significantly different to previous years". 

Advisers operating under the NZFSG FAP will need to pay between $2,500 and $2,600 each for PI coverage over the next year, according to a document seen by TMM Online.

The insurance premium depends on final policy limits and options taken. 

Advisers with their own FAP licence will face much higher costs, starting from $4,100. Those with their own licence will see their premiums calculated via a proposal form, with advisers able to pick an indemnity coverage limit. 

The costs mark a significant increase on previous years. PI premiums were closer to $1,500 per year across the industry in recent years.

The rising costs are down to a hardening insurance market, while underwriters judge the adviser sector to be higher risk under the FSLAA regime. 

Insurance experts, including Crombie Lockwood head of financial and professional risks Andrew Ford, say insurers have suffered poor PI loss ratios across different sectors over the past few years, and expect regulators to take a stronger line on enforcement under FSLAA.

Financial Advice New Zealand also has its own PI scheme, and is set to announce the details in the next few weeks. 

Advisers are disappointed with the increased premiums and have called for insurers to explain their decision-making processes. 

Jeff Royle, an adviser at iLender, questioned how rates have risen, with a historically small volume of claims from mortgage brokers.

"If anything, there will be a higher amount of compliance under the new regime, the risks should be lower, and PI should come down," he said. 

"There is a disconnect somewhere. The regulators are talking about compliance, but the insurers are seeing a different picture," he added.

"I'd love to have a round the table meeting with PI insurers and have a robust conversation with them about their justifications for these hikes in premiums. The loss ratios in the mortgage advice sector must be among the lowest across lines of insurance."

Royle warned the soaring costs could make the sector unviable for some advisers, particularly those wanting to work under their own licence. 

"This could lead to an exodus from the industry," he said. "The consumer is not being helped by this at all."

Tags: compliance Financial Services Legislation Amendment Act

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Comments from our readers

On 4 June 2021 at 11:05 am Straight shooter said:
Who remembers attending a meeting where the FMA said that PI cover should decrease as a result of regulation? Hello FMA and commerce commission where are you? This is meddling bureaucracy at is finest, take something not broken and making it broken. How is a whole pile of advisors exiting the industry helping better consumers outcomes. The fiasco of re-registering and the FMA not even knowing what code should be used was bad enough. Thanks FMA and politicians you are handing back the power and control to the corporate greedy banks again and consumers will be worse off! Nice one.
On 4 June 2021 at 11:41 am AlexTeesdale said:
Well said Jeff. Premium should be assessed on broker business activity; Mortgage Brokers are certainly at the low risk end given (1) nominal insurance payouts (2) double checks at the Bank end (3) increased regulatory scrutiny whereas Financial Advisors who provide Investment advice in High Risk products (and/or hold client funds) are where the Insurance losses have been. Former RFA are now looking at PI premium levels previously applied only at former AFA advisors...
On 4 June 2021 at 12:18 pm Andy the adviser said:
I would like to thank the FMA and the Labour governemt for effectively pricing me out of this industry. Now spending more that $25k a year on compliance, levies, affiliation and aggregator fees, registration and DRS fees, I do believe I (like most other advisers) are truly being shafted!.

On 4 June 2021 at 1:44 pm seandnz said:
Why don't groups self insure? seriously, how many PI claims has there been in the last 10 years against insurance and mortgage advisers? imagine if 1000 advisers paid $4000 into a fund or, even get a re-insurer to underwrite some of it. Of course customers get better outcomes now :-) so therefore less risk to the customer, better service and better advice, I would certainly like to see the PI Insurers come up with the raw data just to help advisers understand why they charge what they do. I think self insure is going to be the only way to control these escalating costs of running an adviser business.
On 4 June 2021 at 3:13 pm Amused said:
$4,100 per p.a. IF it actually ends up been this amount is a small price to pay to have complete freedom and autonomy to run and operate your own business/FAP license as any good mortgage adviser should be doing going forward. Cost when averaged per month it's like doing just two and a bit refix loans for your customers.

If PI insurers actually think though there is more likelihood of a PI claim resulting now from a one or two person adviser FAP business as opposed to hundreds of advisers been lumped under a single group FAP license they aren’t making a great deal of sense and this starts to smell...

All insurers study statistics to calculate and manage risk when evaluating policy applications and setting premium rates. I have not seen anything published in recent years to suggest that there is now a significant number of PI claims been made against mortgage advisers annually. As others have said I would love to see the PI insurers come out and show the industry as a whole the actual number of PI claims been lodged currently in New Zealand.

Remember the whole point of licensing was to improve the quality of the advice been given to customers thus reducing the likelihood of a PI claim actually happening in the first place!

Those experienced advisers who have wisely elected to have their own FAP license will be by definition the kind of adviser who doesn’t need a dealer group “safety net” to continue operating now. By comparison those advisers who are going to be working under a dealer group FAP license will be in many cases be of lesser ability when it comes to their paper work and advice processes. For a lot of the groups these individuals will be an ongoing headache now to manage under their group FAP licensing obligations and in my opinion more of a risk.
On 4 June 2021 at 5:18 pm two cents said:
As a sole director and adviser, I now pay double for everything because I own a company and am a human being acting under my company. Whoopee. Independent FAP's have triple the accreditation headaches. Don't forget new compliance fees and training costs! Who benefits from a veteran adviser being double-dinged financially in a hot market that requires double the work to prove I'm 'doing my job'?

We are now being forced to turn down risky or time-consuming clients. WOE ARE THEY WHO NEED ADVICE THE MOST.
On 8 June 2021 at 9:47 am valkyrie6 said:
We also need to look more closely at who is providing these group PI cover deals, are the groups also profiting from these and not disclosing this to members?
I have a sneaking feeling some of the group’s heads have their mates writing these large insurance deals and splitting the commission, if that true its hardly looking after its members and really competing directly against them.

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