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Could professional indemnity insurance evolve from a mere mandatory transaction to a partner service that helps advisers de-risk their business while ensuring their survival?
This type of model is being championed by Barerock, a relatively new insurer that is on a mission to make PI a friend, not foe for advisers.
Chief executive Jonathan Newell believes PII doesn't have to be a transactional product, priced according to the volume and types of products they have sold.
Instead, it could be a mechanism that helps de-risk an advice business by collecting a broad array of data about its culture and set up.
Advisers have been at the mercy of a cyclical PI market, which hit crunch point some six year sago, as an already shrinking market collided with the defined benefit transfer scandal. This resulted in expensive and exclusionary policies across the board.
In typical cyclical fashion, it has somewhat recovered since, but Newell believes these cycles could be flattened once and for all with a better approach to underwriting PI insurance.
A different perspective
For Newell, PI underwriting should focus on a broader range of data, including about the firm's culture and conduct.
Such an underwriting process first and foremost looks at how products are advised on, the client interaction and the client centricity of a firm, instead of just their turnover.
But this doesn't mean products don't count. Business turnover and product sales still matter, especially to ascertain whether certain products might have been sold en masse, for instance.
And firms with more higher risk products on their books can expect higher premiums to cover the redress risk.
However, firms can also benefit financially from working with certain tech providers as, Newell explains, stronger technology and processes ultimately mean less risk.
He says: "I would much rather insure an advice firm that perhaps some people would consider has got higher-risk products but knowing that they've advised them well, than a firm that advises on vanilla products but advises them really badly."
It's clear that PII underwriting lacks sophistication and would benefit from a more holistic view of the drivers of risk
Newell adds: "We're very much approaching it as a service-orientated product, and proactively engage with our firms throughout the policy cycle to give them tips, tricks and guidance as to how they can ultimately de risk their products with the objective of bringing their premium down.
"For us now it's much more about how the adviser is doing it, how they're recording it, what the systems are like and how they're making sure customer understanding is documented and recorded on their file."
He says the problem with current underwriting practices is that without really good data "insurers are always looking in their rearview mirror when analysing their portfolio. So they're always being reactionary".
Conversely, Newell says, if insurers had access to the right data in real time, "you can smooth the peaks and troughs and you can start helping de-risk firms from a perceived risk much earlier before those risks become actually crystallised".
Unique risks in advice
However, insuring the advice market comes with certain unique risks, one of which is the fact advisers can sell a wide variety of products.
Another is the FCA's ability to issue a past business review, which is a "very difficult risk to quantify from an insurance perspective.
"In other professions you just rely upon the customer complaining, it's not created or generated via regulatory influence," Newell explains.
Moreover, there's also the Financial Ombudsman Service to take into consideration, which decides on complaints based on what is fair and reasonable in its own judgement which, Newell says, typically means a lower threshold than in court.
The ease at which claims can be brought and the eagerness of CMCs to jump on new opportunities are further risks he identifies.
"So I think for the multitude of reasons, the interplay between all of those just makes it really difficult from an insurance perspective to navigate this," he says.
"But it does go back to the data. If you've got the right data, the right analytics that sit behind that, you can move from a reactionary state to a proactive state and almost into a predictive state."
Could this approach work for the wider market?
Barerock focuses on mid- to larger advice businesses, with a turnover in excess of £400,000. And for good reason.
For this approach to work advice firms need their technology and processes in good order, and this expense might not suit the smallest firms.
Barerock, for instance, likes its clients to have solid back-office systems and to work with third-party providers on things such as file reviews.
"It tends to be the medium to bigger firms that have got the ability to have those systems, and can warrant having those systems, in place," Newell says.
"[They] may not be appropriate for a two-man adviser practice and it may not be proportionate, it may not be commercially viable for them."
Adviser Philip Milton, agrees the cost savings may not add up for the smallest firms and it may not offset the extra cost.
"If the premia is low for a small business would it make that much difference anyway, whereas the bigger the business, possibly the bigger the difference," he says.
"Of course the ‘risk’ is that insurers would instead simply demand certain things anyway and that doesn’t make the cost fall."
If you've got the right data, the right analytics ... you can move from a reactionary state to a proactive and almost into a predictive state
Milton saw his firm's PI insurance increase 38.7 per cent in 2022, though it has since returned to normal.
He already tends to compile a full pack of materials as encouraged by brokers and insurers, which goes beyond the simple consideration of the risks of a business proposition.
"Certainly we ‘try’ to enhance our processes and protocols all the time and then to communicate such things to insurers to help them believe we are a professional and organised business," he says.
Daniel Wiltshire, a former actuary, now IFA at Wiltshire Wealth, is in favour of insurers taking a broader approach in their underwriting and agrees this could stabilise the market.
But it's not as straightforward, he says.
"It's clear that PII underwriting lacks sophistication and would benefit from a more holistic view of the drivers of risk. I certainly think that better underwriting would create a more stable PI market.
"However one of the biggest challenges for insurers is the evolving regulatory landscape and concerns that the FCA might move the goal posts in future."
He also agrees culture has a big influence on adviser behaviour but says it's "difficult to quantify objectively".
"If I was an insurer I would also consider rapid growth (either through acquisition or organically) as a red flag," he adds.
Mel Holman, managing director at Compliance & Training Solutions, questions what unintended consequences such an approach might have on market dynamics if adopted more widely, though she agrees with it in principle.
"I think [it] can reflect much better how a firm operates," she says.
"[But] will the end client end up only using large third party providers as they are the only ones on the PI underwriters panel? Could this mean that they pay more for these services than just the PI?"
That's the million-dollar question.
carmen.reichman@ft.com
