Hastings-based financial advisory services firm, Finzo, has called time on “tick box renewal applications” for adviser professional indemnity (PI) insurance as the major provider in NZ backed away from covering small firms.
In a note to members last week, Finzo says the PI market for advisers in NZ is following the Australian experience with “insurers are rationing capital and are being selective in who they back”.
NZI, which provides PI cover the majority of the NZ industry, confirmed this month it would not insure financial advice providers (FAPs) with less than three advisers when the new regulatory regime takes force next March.
“Our concern is, with the level of compliance required under the new regulations, a one or two adviser firm will not have the capacity to maintain their advice levels, their ongoing education, along with all the compliance,” NZI says.
The Financial Market Authority (FMA) did not include compulsory PI cover from its final FAP licensing ‘standard conditions’ released in November, although the measure was in the draft version. Despite the regulatory relief, most advisory firms would likely need some kind of PI cover to meet commercial or risk management objectives.
“Some financial advisers and FAPs may seek to self insure, although the quantum and nature of the reserve funds required to be held on their respective balance sheets is unknown and will only be known as the regulator commences audits from April 2021,” the Finzo notes says. “A little known fact amongst participants is that from the 15th of March, all obligations under the legislation and regulation fully come into effect regardless of the licence type (transitional vs full).”
Steven Burgess, head of Compliance Refinery, said other providers may ultimately fill the PI gap, however, the NZ market is threadbare at the moment.
“Someone else might provide cover [to small FAPs],” Burgess said. “But it could be more expensive.”
In a November PI Compliance Refinery education session for advisers, PI insurance specialists Clinton Stanger and Michael Robertson pointed out that the local market is “primarily NZI Liability (who acquired Lumley 6 years ago) and DUAL, with other insurers participating on very selective individual accounts”.
“Product Providers Risk Appetite is limited due to insurers/reinsurers poor experience in overseas markets,” the pair noted. “Lloyds markets are seeing large exposure to COVID related losses, and capacity to the market is becoming more restricted. A number of Lloyds syndicates have withdrawn from the PI market.”
But PI is available for other professions in NZ offered through the likes of Vero Liability, Chubb, AIG, Zurich, QBE and Berkshire Hathaway, the Compliance Refinery audience learnt.
Whether any of these players would step into the breach remains unclear, however.
“Insurers and furthermore reinsurers (effectively insurers own insurers, who provide treaty reinsurance) look to industry sectors to reduce capacity, or look for large premium increases with more restrictive terms. Such industries are financial institutions, financial advisers and other industries with occupations exposed to volatile such as valuers and engineers etc.
“In summary, it will only get more expensive and insurers are not eager to be in this space.”
The NZI move could trigger further consolidation in the advisory market – a trend already under way – or accelerate the exit of advisers from the industry.
Alternatively, advisers may be able to source group cover, which “may be more efficient”, according to the Compliance Refinery panel.
“Group policies will have Aggregate Limits for all claims under the scheme,” the report says. “An adviser should make sure they are comfortable with the shared approach. This can present risks in some cases as well. Individual schemes are harder to come by than group schemes.”
For example, Finzo says it “has worked diligently for two years to secure its group PI cover”.
“We have been assisting quality boutique advisory practices for seven years with CRM, Platform and client portal solutions,” the adviser note says. “Under the new FAP regime, we will extend our available service offerings to include compliance support and PI cover.”
Burgess said even without the PI curve-ball, advisers will face higher operating expenses under the FAP regime.
“Adviser businesses will have to be more productive and efficient,” he said.