Guest Post

Is Your Professional Indemnity Insurance Provider Going To Triple Your Premium?

It’s becoming brutally clear that the collapse of the Arch Cru investment fund could have serious repercussions for the professional indemnity insurance market. Around 15,000 investors lost out when they were advised by IFAs to put their money in the failed Guernsey based funds. A subsequent investigation by the Financial Services Authority put the blame firmly at the doors of the IFAs and the regulatory body has told IFAs to ring-fence their assets in order to meet compensation claims. 

A spokesperson for the Financial Services Authority has said: ‘We think it reasonable that firms with significant potential liabilities should not make transfers of capital where this may leave insufficient assets on the balance sheet to meet potential liabilities.’

What went wrong?

The FSA’s investigation found that, in the majority of cases, the Arch Cru funds had been sold as low or medium risk investments when, in fact, they clearly came with high risk. 

Clive Adamson, the FSA’s Director of Conduct Supervision said: ‘Investing money can be one of the most important decisions that anyone has to make and investors need to be able to trust the advice they are given. The Arch Cru funds were high risk and they should only have been recommended to investors who fully understood and were willing able to accept the risks.’

The fallout

The action has led to claims that as many as a third of the IFAs involved could go bust as a result of the ‘section 404’ scheme instigated by the FSA. Under the terms of the scheme, all IFAs who recommended Arch Cru funds will be required to compensate their clients. 

The figure of redress could be £100 million. This is in addition to another £54 million scheme announced last year. The problem for the PII industry is that much of the money will undoubtedly be subject to claims, which could significantly raise the price of the insurance at a typical provider. One professional indemnity insurance provider, Howden Insurance Brokers, has already said that premiums could triple as a result.

Director, Neil Pointon said: ‘Insurers will need to make that money back, any other money and a profit, of course, but the premium would need to more than double. In fact, it would treble for just this one instance.’

Quick! Check your PII policy

Despite the industry’s concerns, many policies were sold with exclusions, some specifically referencing Arch Cru funds, so it’s questionable how much of the £100 million figure will be paid by professional indemnity insurance providers. Additionally, those IFAs who can claim will, at the very minimum, be responsible for the excess cost on their policies, normally charged at around £5000 per claimant, so this alone could be substantial for a small IFA operation with a lot of investors involved in the Arch Cru funds. Of course, if the professional indemnity insurance cover doesn’t apply at all, it could be catastrophic for the firm.

Get the right cover from your professional indemnity insurance provider

Certainly, the whole debacle emphasises the need for small IFAs to agree policies that will protect them adequately in the event of investment failures, such as the one brought about by the Guernsey funds. The message for IFAs and other consultants is to make sure your professional indemnity insurance policy covers you in every aspect. Make sure you go through the T&Cs with a fine-toothed comb. 

However, that might now be easier said than done as IFAs might find it increasingly difficult to get cover at all from their provider, as demonstrated recently when Chubb pulled out of the market altogether citing ‘unprofitability’ as the main reason for its exit. Chubb’s departure is highly significant for the industry as a whole since the firm had as much as 16% of the PII marketshare for financial advisers. What’s more, their exit from the IFA market follows similar moves by Beazley and QBE.

A harsh lesson for investors too

The worst case scenario could see as many as 30% of IFAs go into administration. Certainly, smaller firms, with cheaper cover and larger excesses, will be hit hardest. For those who can’t pay, their cases will have to be assessed by the Financial Services Compensation Scheme, meaning large-scale investors will take some of the pain too. Those subject to the FSCS scheme will only be eligible for a maximum payment of £50,000.

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