On Point: Analysis and commentary on issues affecting financial advisers and their professional Indemnity Insurance.
In Conversation With…
Kiran Sihra, Professional Indemnity, Senior Underwriter at AXA Insurance:
We are very grateful to Kiran Sihra for making time to share her observation on a number of risk management issues. As many of our readers will be aware, Kiran is a Senior professional indemnity insurance Underwriter at Axa Insurance. Kiran joined the industry 15 years ago, initially as a HNW & Fine Art Trainee with Hiscox. She has been working in the London insurance market for over 10 years as a professional indemnity underwriter, during which time she has been fortunate enough to gain experience underwriting some of the more niche areas, such as celebrity death & disgrace, advertising agents, events cancellation, and media risks. Kiran was recently shortlisted for the Times and Sunday Times Rising Star in Insurance 2019 Awards which recognise the achievements of women below Senior Management or Director level – representing the female talent pipeline and the next generation of future leaders.
1) What are the current trends and disrupters shaping the IFA PII market?
A key influence on the IFA PII market is the regulator. The recent implementation of the increased Financial Ombudsman Service (FOS) award – uplifting the limit from £150,000 to £350,000 – has been a significant change and has caused uncertainty not only for carriers and brokers, but for IFA’s and the compliance of their PII cover with this new limit. Additionally, Defined Benefit Transfers (DBT’s) continue to be a cause for concern for insurers, especially whilst the FCA continues its review work in this area. Looking beyond the current regulatory impact on IFA PII, disruptors such as online competition from non-traditional personal investment firms are a definite challenge to the way financial advice has been provided. A recent example is Nutmeg, which began piloting a financial advisory service in October last year, charging clients £350. According to the Money Advice Service, average fees charged by IFA’s can vary between £75 to £350 an hour, so comparatively the Nutmeg offering is a far more attractive, accessible proposition. It remains to be seen if the pilot is successful and what providers such as Nutmeg are able to offer as long-term, viable solution for customers, and the impact this will have on the traditional financial advisor model.
2) How does technology, including social media, present new risks to identify and manage? And what should IFAs be doing to future-proof their organisations against such risks?
We cannot escape from technology and social media as it permeates every aspect of our lives. IFA’s need to embrace social media to engage with their customers in a different way, using all the available tools and avenues that social media affords. Financial advice needs to be perceived as a positive step providing advantage to the customer rather than a burden or with an inevitable negative outcome for the individual seeking advice. Financial advice should be actively encouraged for everyone as an important measure towards greater control of your financial circumstances and planning for the future, something that people don’t often think they need until later in life, or only when faced with a life altering event such as a growing family, divorce, illness or inheritance liability. On the flip-side, there are inherent pitfalls and dangers of social media, and there have been some high-profile cases in the news in recent months. Firms need to ensure that guidelines are implemented and understood by employees, thereby avoiding potentially damaging scenarios for example where something posted privately could be linked back to the firm impacting their reputation, or breach of data protection law as we have seen over the last couple of years with a number of high-profile corporations.
3) There is pressure to provide low cost automated advice for smaller investors. How far away are we from robo-advice and what risks does it present?
Robo-advisers have been in existence since 2008, and with ever-improving technology, machine learning and investment in fintech and insurtech by financial product providers and insurers, robo-advisers are very much here to stay with the automated advice platforms growing. The advantage for the consumer is low-cost management of financial investment, around the clock access and efficiency. However, there are arguments that these models are effectively ‘execution only’ products. There has been some interesting coverage on robo-adviser platforms hiring human advisers to support and supplement the robo-advice, which raises questions on the long-term viability of robo-advice only business models. Ultimately it seems that consumers want that human contact-point and advice, which is encouraging for IFA’s. Good, professional advice by a qualified, experienced practitioner looking at more than just an algorithm has its place and can be invaluable. Nonetheless, human advisers need to be alive to the potential threat posed to their business models and need to consider ways in which to be more accessible, agile, efficient and competitive for their customers.
4) The FCA warned of a 140% premium hike when the increase in the FOS limit to £350,000 came into play on 1st April. The insurance industry's original prediction was higher. What impact have you seen to date and what are the long-term implications for premiums and cover generally?
The IFA PII market is hardening and this is seen across the board. The fundamental principle of insurance is for the premiums of the many to pay for the losses of the few, and with the regulatory changes and increasing scrutiny on this profession, it is inevitable that firms will see an increase in their premiums, and policy cover being reduced or restricted. At the moment it feels as though we are on the verge of a market turning event for the IFA profession, and the danger is there will be a reduction in capacity in the market with fewer insurers willing to participate in the provision of IFA PII. On a positive note, we have seen the Personal Finance Society (PFS) introduce a new Gold Standard accreditation for best practice for advice relating to Defined Benefit Transfers, supplemented by a consumer guide for DBT’s. This is an encouraging development that has had wide support in the industry with more than 200 advisers signing up in the first few days of its’ launch in April 2019. Measures such as these can only be beneficial for consumers, advisers, insurers and the regulator.
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.