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New and cheaper PI insurance hits the market

A new entrant has joined the crowded professional indemnity (PI) insurance market for mortgage and financial advisers.

Sunday, April 30th 2023, 6:50AM 8 Comments

by Sally Lindsay

Quadrant PI is offering easy access to cover, no-strings-attached quotes, clarity and transparency around policy wording and fees, and premiums that last year were about 10%-15% lower than their competitors.

The new company is the brainchild of a small group of advisers who, for no apparent reason, saw their annual PI premiums skyrocket in price about 18 months ago. Their risk profiles hadn’t changed, and there had been no adverse claims against them but their premiums had suddenly tripled. 

At the small end of town this meant premiums for a single adviser/director soared from $2,500 per year to $4,000, while at the bigger end of the market premiums for a firm with five to six advisers rose from $10-11,000 to $30,000 annually.

The group decided to take control and launch their own PI scheme – one specifically designed by advisers, for advisers.

Interest sprials

Quadrant director Tony Vidler says the ease with which advisers can access the product is one of its biggest drawcards.

Interest from advisers in the new product has spiralled and about 150 adviser businesses have already signed up. On average, single advisers are saving 10-12% in premiums, with bigger firms being up to 20% better off, Vidler claims.   

While some PI providers require advisers to join an industry association and agree not to shop around among competitors before giving them a quote, Quadrant welcomes all comers who meet its criteria.

“We’ve made it easy for someone to get a quote, regardless of where they are, which most of the other schemes don’t allow,” Vidler says.

Advisers who want to check out Quadrant can see the policy wording before buying a policy – something which until recently was almost unheard, with most PI providers preferring to leave policyholders in the dark about the wording until they have bought cover. Even then, some providers will not give policy wording.

“Many schemes flatly refuse to provide policy wording,” Vidler says. “Supposedly, it’s because they think that giving out the wording will somehow encourage more claims.”

Cover demanded

PI cover is not mandatory by law for advisers, but insurers, lenders and fund managers demand advisers be covered before giving them an agency to sell their products.

PI insurance is notoriously expensive, largely because most Kiwi providers are subsidiaries of Australian insurers who price for their home market without taking into account that risk and claims experience is different in New Zealand.

For example, D & O (directors and officers) liability claims are much higher in Australia, which runs a heavily legislated, very prescriptive regime, Vidler says.

“It’s a crowded space over there with a lot of people looking for trouble and a lot of trouble to be found. There are big company brands and big scale in advice. That’s not the structure here.

“Apart from the advice given by big trading banks, New Zealand has a deconstructed financial advice industry. There are lots of small businesses embedded in local communities with a principles-based approach,” Vidler says.

“That drives different behaviour here, with more personal responsibility by individual advisers to do a good job with consumers and behave professionally. Their individual reputations and assets are on the line, and they are often dealing with communities where they and their families live. So, the product is not well-priced for New Zealand and doesn’t reflect the risk here.”

Quadrant, Vidler says, has zeroed in on price reduction and being “far more transparent” with brokerage and fees.

Over the years there has been considerable “layering” of extra costs from the brokerage industry which were often not disclosed to clients and “a real degree of protectionism” around the key players, including industry associations which would charge advisers joining fees in return for, among other things, access to PI cover.

Insurers generally refused to deal directly with individual advisers or small advice businesses.

‘Beggars belief’

Vidler says the recent sudden rise in premiums was covered off by insurance companies claiming advisers have moved into a riskier environment now they are regulated. “To be told they are in a riskier environment when the general consensus is the public is safer because of regulation, beggars belief,” he says.

Insurers also changed their model on assessing risk. “Now they assess a business overall and not individual advisers and say this means premiums had to rise.

“There was also the perennial excuse that they are under pressure from re-insurers,” he says.

“However, insurance companies never produce any data on how many PI claims they deal with in a year, although advisers have to let their insurance company know if a claim could be made against them.”   

Vidler says it would be easy to assume insurance companies are making a 50% gross margin profit on PI insurance.

This is at a time when advisers have had their margins squeezed over the past four to five years. “Businesses, instead of expanding by hiring more people, are now looking to technology to minimise costs in a high cost-of-living world.”

Past advice 

Another significant benefit of Quadrant’s scheme is that retroactive cover is automatically included. This means a policyholder is covered for advice he or she has given in the past, no matter which insurer held the policy at the time.

“It’s a pretty big deal,” Vidler says. “Most advisers don’t understand how important this is.”

Quadrant’s target market is independent advisers, many of whom belong to small-to-medium-sized FAP (Financial Advice Provider) groups which came into existence as part of the new licensing regime now overseen by the Financial Markets Authority (FMA).

According to the FMA, there are about 8,800 licensed advisers in New Zealand, most of them collected under 1300 FAPs.

Some of these FAPs are large (with 700+ advisers under their wing) and these businesses generally organise their own bespoke PI cover. But there are many smaller operations with between two and six advisers, Vidler says.

Quadrant’s directors are Royden Shotter (chairman), Jason Kilworth, Kevin Smee and Tony Vidler. All are practising advisers with decades of industry experience, as are Quadrant’s seven shareholders.

The Quadrant product is underwritten by QBE and accessible through broker Phil Mitchell of Hutchison Rodway.

Tags: insurance

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Comments from our readers

On 29 April 2023 at 5:42 am Tony Vidler said:
Every NZ financial adviser paying for their own Professional Indemnity Insurance should check this out, no matter who they are aligned with (and if your current broker or insurer won't let you get quotes elsewhere that is a jolly good reason to think about running anywhere else anyway).

BTW: the idea that clients (being the person paying for the PI insurance - i.e. "the adviser of FAP") can not change insurance "mid year" is rubbish. You can.

On 30 April 2023 at 9:48 am w k said:
a few questions come to mind:

1. is there a conflict of interest making it mandatory that advisers in the group have to go with the appointed PI provider?

2. any disclosure? any benefit by way of commission, referral fee or kickback, paid to the group?

3. is this practice acceptable by the regulators?

i believe undisclosed conflict of interest and non-disclosures are not acceptable practices in the regulation for advisers.
On 1 May 2023 at 10:17 am valkyrie6 said:
Thank you so much Tony, this is the best thing to happen to the finance industry in years.

The dealer groups have been dictating and monopolizing this cover for years now, and some would threaten to cancel the group PI cover on the spot if a member decided to change groups, which is a bullying tactic to make the member sticky.

Securing PI has been intrinsically linked to having to belong to head groups for mortgage advisers made compulsory by the banks, and for one example a large dealer group that has its own PI cover scheme forced members to take all option extras on the cover and wouldn’t let them opt out if the extras where not relevant to their business (IE AML) all with the view to increase the premium for the dealer groups own insurance adviser that provides the scheme and happens to be best mates with the Dealer group CEO, how convenient ? , no back handers to see here.
Another terrible example of mild extortion is when AON imposes higher cover (3 million or more) minimum for any adviser that also have F&G books, funny enough I know of an adviser who had to increase their PI cover because Aon told them so because they had an Aon F&G book (coincidence?)
Then 2 weeks before the 15th of March (with no warning prior whatsoever) Aon instructed the adviser his Aon book will be confiscated if the adviser could not prove he had the extra insurance paper for level 5. Nice one Aon, please don’t complain when your PI cover book shrinks dramatically.
On 1 May 2023 at 1:21 pm Murray Weatherston said:
Prima facie, this new offering has the potential to be very disruptive. A number of dealer groups and adviser associations appear to have their PI offering as one of their main USP, so if the Quadrant offer cannabilises these other entities' members' PI. there might well be some big member shifts Watch this space.
On 1 May 2023 at 2:14 pm Amused said:
Been told last year that their PI premiums would be increasing substantially due to the industry been licensed never made any sense to established advisers. When it comes to accessing financial advice, the New Zealand consumer has never been as well protected as they are now, yet the PI insurers and head groups would have us all believing the likelihood of a PI claim happening has increased. Absolute nonsense!

I hope then that every adviser in the country gets a PI quote from Quadrant and I wish Tony and co all the best. Thank you, guys, for having adviser’s backs when our head groups don’t appear to anymore.

Good Returns could you please publish this article on the TMM website so that as many mortgage advisers can be made aware of the Quadrant offering.

On 2 May 2023 at 10:27 am Tony Vidler said:
thanks for the feedback and comments. A couple of answers/responses:

1. Financial advisers should remember that the people giving them financial advice (i.e. the broker or FSP saying "You should take this policy") have the same disclosure obligations that you do...ask away about brokerage, fees, conflicts of interest, etc. (Not that you shoiuld have to ask, right?)

2. While it may annoy us that a business creates a commercial condition (e.g. Aon insisting on 3 mill cover in the readers example above) - we do have to acknowledge that those businesses are perfectly within their rights to make such things conditions of doing business with them. Our choice as advisers is then to decide we don't like their terms and will go elsewhere, or agree to their terms if we want to do business with them. They do have a right to decide on their own commercial/agency terms.

Clearly we (Quadrant PI) agree that the advisory risk in NZ is generally mis-priced and miscalculated, and like many other advisers we feel that there should be freedom of choice. If that is disruptive to others then so be it...but if all it does is make other market participants become more transparent, or work harder to deliver better cover, or minimise their fees and costs, then that is still a good outcome for the industry as a whole. We'll be ok with that too.
On 3 May 2023 at 8:31 pm JPHale said:
Well done Tony! This is an area that needs the obvious hypocrisy addressed.

There is one point, which I've made before, when it comes to advisers advising advisers FSLAA does not apply.

The legislation suspends FSLAA requirements when the person/entity receiving the advice is registered on the FSPR.

Correct if the FAP is asking another adviser for advice for a client (pass through), or if you are a product matter specialist in the area being advised.

But it doesn't make sense when applied to say a life risk adviser receiving F&G advice or a mortgage broker seeking life risk advice.

FSLAA needs a tweak to say it doesn't apply to registered FSPR members when it is advising another FAP that is not seeking advise as a client or when the FSPR member holds qualification in the same specialty they are being advised. All others should have FSLAA apply.

In the same way say a general chartered accountant may defer to a specialist international tax or intellectual property adviser when advising one of their clients.

The advice is to the CA who then bundles that knowledge with the wider advice they provide (with appropriate disclosures and details)
On 3 May 2023 at 8:55 pm JPHale said:
In reference to my comment about FSLAA not applying to advisers receiving financial advice.

The legislation specifically defines FAPs and FA’s (FA’s with some difference) as wholesale clients.

Section 48.2

The following persons who receive a financial service are wholesale clients in respect of that financial service:
(a) a person who is in the business of providing any financial service and receives the financial service in the course of that business:

* watch for that “any” word in the clause...

(h) if the financial service is a financial advice service or a regulated client money or property service, a person who is a wholesale client in respect of that service under clause 4 of Schedule 5 of the Financial Markets Conduct Act 2013.

* Though this does have an opt opt clause in clause 4. And there's eligible investor certification the risk community hasn't had to deal with much until now either.

That's not to say you can't ask questions and expect the same retail advice approach as a FAP, but the law isn't going to support a complaint in the same way or hold that FAP/FA to account either.

When it comes to services provided to a FAP it's a bit of a hole me thinks...

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