No appetite for PI any longer: compliance expert
After NZI’s announcement regarding PI, compliance expert Steven Burgess says that PI is on its way out the door for smaller businesses, but that might not be the end of the world.
Wednesday, December 16th 2020, 5:55AM 
6 Comments
by Daniel Smith
While many people in the industry, including the FMA, were surprised by NZI’s shock move to not offer professional indemnity cover to FAPs with under three advisers, there were a few people who saw the move coming a mile away.
One of these people was Steven Burgess, director of the Compliance Refinery. Burgess says that PI has been an area of scrutiny for insurers.
“In talking to PI providers, they have been telling us that the market is just changing, there just isn’t any appetite for PI any longer.”
Burgess believes that rising risk is causing many providers to consider exiting sections of the market, not just NZI whose announcement last week shook the industry.
“It’s my understanding that it's just not palatable to take on the level of risk that PI requires. It’s a sector of the market where risk is going up exponentially for those that insure.”
Although rising risk is an issue affecting the entire market in this period of global uncertainty, Burgess says that financial services are feeling the particular brunt of the levels of fines that face those in the industry who get something wrong.
Burgess says that advisers need to make sure they understand the complexity of the new regime.
“The thing is nobody goes out and purposefully writes bad business. It also could be down to luck, you could have an unmeritorious complaint that cost you $25,000. Advisers need to be thinking, ‘Can you float that kind of money?’ ‘Can your business sustain that?’ and ‘Can you manage that stress?’.
“The biggest thing that PI offers an adviser is that they [the insurer] defend the claim so that you don’t have to. We live in an environment when all small business costs are going up. I think we tend to forget that advisers are businesses, even the smaller FAPs. So they have to assess their risks and determine if it is worthwhile.”
While many are concerned about the direction that the industry is heading in, Burgess wants to remind people that there is more to the shape of the industry than the regulator. “The regulators have made a space for small businesses to operate, but there are other things at play here that are going to determine how those businesses operate.
“All industries are impacted by key counterparties. Take a manufacturing company for example, they have huge constraints based on their supplier. This situation is no different than that.
“You have suppliers that are businesses that have to make risk decisions based on what is best for them. The industry's job is to react, and to come up with viable business structures and profit models that the regulator puts in place.”
In terms of the industry’s reaction, Burgess is hopeful that smaller FAPs will find a way forward from this.
“The industry is going to come up with solutions here, it always does. Advisers will decide if they want to be advisers or if they want to run businesses, and go and find homes if they don’t want to do both. I think the industry is going to be fine.”
Burgess even believes that there is a clear path forward for advisers to retain PI insurance under the new regime.
“We suggested that the government start up a fund to guarantee remediation of clients in financial services. Advisers would pay into that fund and settlements would come out of that. This is relatively common, we have seen this system be quite successful in Canada.”
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Comments from our readers
Why are people thinking that advisory businesses need to re-structure their ownership, estate planning and tax management issues and trading position because a single type of insurance cover ceases to become available (which is actually yet to be determined)? Is that normal in other industries?
I ask because this line of thinking seems to have been assumed very quickly by a range of pundits: Should PI be commercially unavailable then those businesses to whom it is unavailable (which is only a portion of the market) must re-structure to ensure that that can qualify for the cover by fitting in with the dominant PI insurers own business agenda.
Why?
If some exporters cannot insure their currency risk must they merge with those who can? If some retailers cannot transfer public liaibility risks must they cease trading? One could go on...but the answers to these questions are "no".
It is not a legal requirement for an advisory firm to have PI cover. It is prudent for sure. It is is in fact preferable...if it is reasonable cover at a fair price. If it becomes extortionate then it potentially ceases to be a valid risk transferrance tool. It just becomes a barrier to entry for small businesses, and inhibits market competition.
Surely nobody wants that?
I have no issue with NZI making its own business decisions for its own reasons. However I cannot see why their commercial agenda needs to become mine.
Well said.
What do fines have to do with PI?
Advisers have never had the courtesy of considering whether PI is worthwhile... it is required as part of our agency agreements - we are conveniently paying for the defence funding that prevents them ending up in the firing line.
We begin to find a solution to this by closely examining the reasons why PI is REQUIRED, who requires it, and the role providers of it will therefore play in the new regime.
Like TV I'm not saying I don't want PI, or that it is not necessary. But that would rather it be my choice whether to have it, how much, who from etc.
While PI claims claims are low, there are a significant number of complaints that start as a dispute resolution service problem but are not settled by the disputes resolution service.
Which is to say these complaints have a PI claim component but are not visible because of the confidential nature of the settlement process.
How many fall into this category I have no idea. However, the insurer reality is if they are getting them at a reasonable level with the wet bus ticket RFA approach, they are certainly going to be in significantly higher numbers with the new legislation.
However, I would argue that the larger firms with more advisers are more at risk than single trading advisers. Is the single trading advisor with a license is likely to be better positioned which is why they took a license.
The ones that don’t have a license and moved to groups are going to have a gap that needs to be managed, this is where the bulk of the risk is going to be.
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"The industry's job is to react, and to come up with viable business structures and profit models that the regulator puts in place.”