by Jenni McManus
That was the view of one less-than-happy camper on a recent webinar, hosted by Financial Advice NZ and advice firm Curated Risk, to discuss major changes to professional liability insurance that come into force on July 1.
Insofar as advisers and FAPs are concerned, the disgruntled adviser nailed it with his assessment of the changes coming down the line.
As Curated Risk director Clinton Stanger puts it on his website: “The professional indemnity market in New Zealand is experiencing a hardening cycle – increasing premiums, reduced capacity and tightening policy conditions.”
The big picture is more nuanced than that. Under-pinning much of the change in the way professional indemnity (PI) insurance will delivered are structural changes to the financial services sector itself, with the new licensing regime coming into force in March next year.
A couple of years ago, Stanger says, PI insurance was a homogenous, off-the-shelf product provided to hundreds of individual advisers at a flat-rate premium. But these advisers are now moving into or becoming licensed FAPs, which will hold the PI policies.
These FAPs are very different from each other, and this will be reflected in the types of PI policies they require. “So, that has driven our thoughts in developing a modern and relevant program,” Stanger says.
The professional liability programs Stanger’s firm has designed, in conjunction with Financial Advice NZ, are not for large FAP businesses. Usually, these bigger FAPs come under group policies or have individual policies that sits outside the association's program, he says.
This program is designed for smaller FAPs with advisers working in risk and investment. A small survey of Financial Advice NZ members revealed that most FAPs (109 of the 125 respondents) have annual fee income of $500,000 or less, with none topping the $1 million mark. For PI cover, about 90% of companies hold limits of $1 million to $2 million. For example, mortgage advisers are typically around the $2m mark, unless they’re an aggregator, when a $5m limit is common
Financial Advice NZ chief executive Katrina Shanks says PI premiums “went through the roof” last year. They’re going up again this year and will be based on a FAP’s revenue and the type of advice it provides.
Stanger puts it this way: “Underwriters look at the financial advice industry and see the perceived risk. They look at claims’ history but [they also] look at the regulatory changes. They look at the FMA and [see that] those regulators are being resourced-up and they see more of a perceived risk than the claims history tells them.
“We are not talking about a decrease in premiums. We are talking about premiums that are relatively the same or a slight increase based on your revenue,” he says.
“Now, we are in the traditional way of how the insurance industry underwriters PI policies. It’s the revenue to the company and the advice that the company gives that is the main driver of the premium.”
Some advice categories are deemed to be riskier than others. Underwriters believe investment advice carries the highest risk and mortgage advice the lowest. In the middle are life and health advisers.
Stanger says profession liability cover has become expensive for other groups of professionals such as architects, engineers, doctors and lawyers’
“If you were an architect, you’d probably pay six times the amount financial advisers pay for PI premiums,” he says. “If you’re a lawyer, it’s probably five times as much and your excess starts at $50,000, not $5000.
“The reality is that PI insurance is expensive and two or three years ago when you could insure your professional liability for the same price as insuring a Toyota Corolla for 12 months, that doesn’t make sense.
“It’s long-tail business …. The underwriters involved in this industry in New Zealand are not involved in the industry in other parts of the world as they see the exposure as [being] too much to outlay their capital. And that effectively is what an underwriting company is doing. They’re outlaying their capital and looking for a return. If that industry doesn’t make sense to them, they have no appetite in that space.”
Another big issue is run-off cover. Free run-off cover has now disappeared, meaning advisers who retire, leave the industry or sell their businesses now need to stump up the premiums to ensure their PI policies remain in place to cover any future claims arising from previous advice they have given. The length of time is up to individual advisers, but most liabilities survive for seven years.
As a rule of thumb, the first year of run-off cover will cost 90% of your expiring premium, Stanger says. The cost then falls by 10% -15% a year. But get advice, he says. There are ways of structuring these premiums to spread the cost.
Another contentious issue is the move by underwriters to scrap the advisers’ ability to pay their PI premiums monthly through FANZ. Premiums will now be invoiced and paid annually, though an independent business, Financial Synergy, is offering a monthly payment scheme with interest rates ranging from 4.5% to 5.25%.
NZI is no longer underwriting PI cover for the sector. Two new underwriters have been appointed: for FAPs giving investment advice, Berkshire Hathaway will be the underwriter while Ando Insurance will underwrite mortgage, life and health, and fire and general policies.
Curated Risk deals in three types of professional liability insurance: PI cover, management liability insurance and cyber risk cover.
Along with PI cover, Stanger says management insurance is important. It covers innocent statutory breaches, defence costs and fines and penalties that regulators or courts might impose. It also covers directors’ and officers’ liability. Stanger says the biggest risk he sees for financial adviser businesses is statutory liability.
NZI is the predominant underwriter for cyber risk insurance in New Zealand. Some policies offer access to an expert panel which include forensic data scientists, a PR firm to handle communications to clients and the market, and other experts that can get a business back to work as quickly as possible.
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