Financial Planners have had numerous challenges in recent years as a result of intensified compliance, levy’s, advisors leaving the industry and the cost and availability of insurance.
In recent years, we have seen major insurers remove themselves from the Financial Planners PI Market due to an increase in claims and regulatory changes. This has left a small pocket of insurers who have the capacity and appetite to provide cover.
However, there is good news on the horizon and there are signs that market capacity and appetite is starting to flow back to the industry. An example of this is a new participant entering the financial planning insurance market recently.
We work with several Financial Planners and here are some tips to keep in mind when reviewing your insurance program.
Preparation is Key
Preparation is key and ideally you should be working with your advisor at least 8-10 weeks in advance to develop a clear strategy.
There is typically a fair bit of back and forth with the underwriters, so ensuring your advisor has sufficient time to negotiate on your behalf is crucial to getting the best possible outcome.
This approach will also enable you the time to review the options available so that you can make an informed decision on your insurance risk.
Update Your Documents
It sounds simple but it is important to provide up to date documents when submitting an application to the insurers which should include the following:
- Approved Product List
- Complaints Register
- SOA
- FSG
- Training and Development Programs
- Switching and Replacement Policy Guidelines
- Onboarding AR’s Policies and Procedures.
- Details of any recent audits undertaken.
You only get one opportunity to make a first impression and by updating and maintaining the documents on a regular basis, the insurer will have more comfort around your risk management which will only aid negotiations.
See also: Professional Indemnity Insurance
Claims or Incidents
If you have had any claims or incidents then we would encourage all clients to advise not only the circumstances of the incident but also what measures have been put in place to avoid the incident occurring again.
Minimum Limits of Indemnity 
Every business will have different requirements and whilst there is an element of choice involved there are minimum requirements as per RG126.
For the limit to be adequate, a PI insurance policy must have a limit of at least $2 million for any one claim and in the aggregate for AFS licensees with total revenue from financial services provided to retail clients of $2 million or less.
For AFS licensees with total revenue from financial services provided to retail clients greater than $2 million, minimum cover should be approximately equal to the actual or expected revenue from financial services provided to retail clients (up to a maximum limit of $20 million).
These are the minimum requirements; however we would recommend that any decision on the limit of indemnity takes into consideration the following:
- Volume of Business
- Number of Clients
- Type of Clients
- Funds Under Management
- Number of Representatives.
- Retail vs Wholesale Clients
Defence Costs – Inclusive or Exclusive
Defence Costs under PI policies are insured on a cost inclusive or a costs exclusive basis.
It is important to understand the basis of your cover so that you are fully aware of the true limits of Indemnity under the policy and therefore comply with RG126.
A costs exclusive basis means that the legal costs are in addition to your indemnity limit. Due to this, a costs exclusive basis is recommended as the investigation and legal costs will not erode the limit of indemnity. This basis of cover leaves the limit of indemnity intact to cover any compensation awards.
A costs inclusive basis means that legal costs are included within your indemnity limit. The cover is therefore more limiting as the investigations and defence costs erodes the limit of indemnity. If you elect to insured on this basis then you should ensure that the limit of indemnity takes into account the inclusion of your defence costs.
Our Approach to Financial Planners Insurance
Our team has significant experience in this sector and work closely with Financial Planners on their insurance risk program.
Please feel free to contact us at Crucial Insurance and Risk Advisors if you would like to discuss how we can help you.
See also: Five Insurance Tips for Aged Care Organisations
Reference: https://download.asic.gov.au/media/niddj53n/rg126-published-06-july-2022.pdf
This article was written by Daniel Weir,
Account Executive at Crucial Insurance and Risk Advisors.
For further information or comment please email info@crucialinsurance.com.au.
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