New and cheaper PI insurance hits the market

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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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