The professional indemnity market for advisers is poised to enter a phase of “recalibration” as it continues to adapt to the long-term implications of pension freedoms, regulatory changes, and the impact of increased Fos compensation limits.
In a blog post for trade body Pimfa, Richard McGrath, director at Onyx Insurance Brokers Limited, discussed the past, current and future state of the PII market, highlighting the challenges and opportunities that have emerged.
According to McGrath, the period between 2014 and 2022 was marked by “significant regulatory changes and evolving market conditions”.
“The introduction of pension freedoms in 2015 stands out as a landmark reform, granting individuals aged 55 and older greater access to their pension savings. While this offered unprecedented flexibility to consumers, it also introduced complex advisory challenges and heightened risks for financial advisers. This, in turn, led to increased scrutiny from insurers,” he explained.
McGrath said the aftermath of pension freedoms saw a surge in demand for advice on pension withdrawals and investments which was accompanied by a corresponding increase in the complexity and liability associated with such advice.
He added: “The period also witnessed a crucial regulatory adjustment with the increase in Fos compensation limits in 2019. Since consumers could now claim higher amounts for misadvice, this change increased the potential liability for financial advisers, impacting the cost and terms of PII cover.
“Insurers responded with caution, tightening underwriting criteria and raising premiums to mitigate the heightened risk exposure.
“This era also saw some insurers exit the market, further straining capacity and complicating the quest for adequate and affordable PII cover for financial advisers.”
The current landscape
From 2022 to 2024, McGrath believed the PII market has been navigating a “phase of cautious stability, tempered by ongoing challenges”.
He explained how the effects of pension freedoms are still being felt with a steady flow of claims related to pension advice highlighting the need for “stringent risk management and robust advice processes”.
However, McGrath felt that despite these pressures there were signs of market adaptation.
He said: “Insurers and financial advisers alike have developed a more nuanced understanding of the risks associated with pension freedoms and the increased Fos limits, leading to more sophisticated risk assessment and management practices.
“Premiums, while still on the higher side, have begun to stabilise, reflecting a gradual balancing of risk perceptions with the realities of the advisory landscape.”
According to McGrath, the regulatory landscape has also evolved with the FCA tightening standards around pension advice and PII requirements.
“This regulatory push towards higher professional standards and better consumer protection is fostering a more resilient insurance market, albeit with the expectation that financial advisers maintain rigorous compliance and advisory protocols,” he added.
Shifts towards ‘new equilibrium’
McGrath believed the PII market for advisers was shifting and entering a phase of “recalibration”.
He said: “Technological advancements and insurtech innovations are expected to play a crucial role in shaping the future, offering more tailored and flexible insurance solutions that align with the specific needs and risk profiles of financial advisers.
