Why the AFSL system is driving up PI costs

Alex Burke,  Senior Writer,  No More Practice Education

In its submission to the Australian Small Business and Family Enterprise Ombudsman’s Insurance Inquiry, the FPA has called out the absence of Government support for affordable professional indemnity (PI) insurance cover for small advice businesses.

The FPA said that the advice PI insurance market was "built for large licensees," which in itself is symptomatic of the AFSL regime's "bedding-down under the Financial Service Reform Act 2001." Historically, the submission noted, AFSLs were held by "large financial services institutions who authorised financial planners provide financial advice to consumers under their license."

As a result of this, the PI offering from insurers has traditionally been designed for large institutions; the value to the insurance business has been in "large licensee [policies]. It was not built for small businesses to hold their own policy."

The FPA said that for the average small advice licensee, PI insurance costs around 2-3% of business revenue. And in 99% of cases, PI premiums increase year-on-year, irrespective of the individual business's claims history.

Part of the cost comes from the fact that, according to the FPA, insurers don't differentiate the risk presented by "large licensees with large numbers of authorised representatives" and small advice businesses with significantly fewer authorised representatives. "Small financial planning firms," the FPA added, "have been informed by insurers that large premium increases are due to the broader market."

There are other issues, though. The submission noted that the market for advice PI insurance "continues to be difficult and unprofitable for most insurers," which has led to insurers and underwriters leaving the space. This has had the effect of reducing competition in the market, which the FPA said "significantly impacts the affordability and availability of appropriate cover."

In these circumstances, the FPA has argued that smaller businesses are bearing the brunt of increasing PI costs for advice, obligated as they are to hold "adequate levels of cover," per Section 912B of the Corporations Act 2001.

Separately, the FPA also noted "media reports and warnings from governments and regulators" regarding increased threats of cyber-attacks in financial services.

This compounds the above problems for many advice businesses as there is currently confusion about the different insurance policies covering cyber-risk and data breaches "and the value of such cover for small business on top of policies already held." In our latest season of After Hours, we discuss cyber-risk in financial services in more detail.


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This only a part of the reason. The real reason for the driving up of insurance costs is manifold. 1) Client Preferential Bias. AFCA, unlike FOS before it, in nearly all cases, takes the side of the complainant. This statement is borne out of statistics not emotion and is a simple fact. 2) Higher payouts. Whereas if a client complained under FOS and won, the compensation was generally up to 80% of the claimed losses. AFCA it is in excess of 100%. 3) Australian law is designed to payout compensation. I don't say this lightly. In nearly all cases where it would be hard to find fault, and under the new FASEA Code of Ethics can find plenty legitimate or not, the clients lawyer or adviser can always run up the "Misleading and Deceptive" flag. Using this there is no onus on the complainant to prove that the advice was compromised, conflicted or that there was even intent. No other country in the world has this "get out of gaol free card". 4) More litigious society. Since the Royal Commission into Banking and the publicity associated with it, clients are becoming more litigious and advisers are helping them make claims, with lawyers also getting on the bandwagon and are instigating class actions. No other profession in any other industry in any other country in the world works under the sword Damocles the way we have to on a daily basis. My son having completed a Bachelor of Business wanted to join me in my business 5 years ago, I talked him out of it because the writing was already on the wall then. Even large advice licensees are struggling under the collective weight of regulation and complaints, as well as having their value wiped out. It is only the large conglomerates that can make any money and succeed in this current environment.

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