MENDING THE SAFETY NET

After several years of headwinds, the supply of professional indemnity insurance to financial advisers is on the up as the sector's transformation makes it more lucrative. But has it evolved with the profession and is it fit for purpose? Matthew Wai explores.

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Professional indemnity (PI) insurance has long been somewhat of a thorn in the financial advice industry's side.

Much of this has had to do with cost, with advice groups having copped significant premium price rises in recent years.

According to APRA data, as at 2022-end average premiums for financial advisers had risen at least 40% since 2015.

But to understand why, we actually need to go back to 2012 - the year the Future of Financial Advice (FoFA) reforms were implemented.

Pre-FoFA, PI insurers were making significant losses, MKM Partners senior partner Oscar Martinis°¹ says.

While one would expect the introduction of the Best Interests Duty to curb this, many insurers had already made their minds up and decided to cut those losses, opting to give up servicing the sector altogether.

This created a squeeze on supply, which was then exacerbated once the Royal Commission came around. With widespread misconduct and non-compliance uncovered, the risks associated with providing PI cover to the adviser sector went up.

Over the period insurers including several Lloyds syndicates, AIG, Axis, DUAL Australia, and Vero exited the PI insurance space, simultaneously creating even less competition and making those remaining insurers more and more wary of insuring financial advisers.

As simple supply and demand dictates, fewer insurers covering more advisers with heightened risk counts results in higher pricing. As Martinis points out, each insurer has "a limited amount of capital to deploy, and they charge accordingly." Cost of PI insurance was also highlighted by Michelle Levy in the Quality of Advice Review, as she had heard from many advisers that it was a key contributor to the cost of advice and sustainability of their practices.

But the tide is beginning to turn, Martinis notes.