In ASIC’s 14 December 2015 Media Release, ASIC reports that a review of the Professional Indemnity (PI) insurance market aimed at Australian Financial Services licensees shows signs of industry improvement, however some deficiencies were also identified. The review was conducted following concerns raised by Licensees about availability of PI cover.
As well as gathering objective data about the PI industry, ASIC sought to better understand the availability and cost of PI insurance to determine whether the currently available policies conform with ASIC’s adequate standards, as per the minimum requirements set out in Regulatory Guide 126 Compensation and insurance arrangements for AFS licensees (RG 126). As well as these objectives, ASIC sought to identify any significant deficiencies throughout the PI insurance industry.
In relation to availability, ASIC found, as expected, that the PI insurance industry suffers from significant premium increases in periods where insurers suffer poor profit ratios, as exemplified by the global financial crisis. The review indicates the market continues to stabilise and premiums flatten as market conditions improve. Despite this improvement the review noted there is a greatly increased selectivity and highly cautious PI insurance offerings. As well as this, ASIC noted that automatic run-off cover is still not generally available to licensees intending to close their businesses.
In relation to adequacy of PI insurance, ASIC identified five areas of concern in which a disparity exists between ASIC’s requirements in RG 126 and the PI insurance policies that are currently generally available. The areas of concern include:
- Defence costs;
- Fraud and dishonesty cover;
- Aggregation of claims – Limit of indemnity; and
- Lack of claim aggregation – Excess payable.
The particulars of these five areas of concern can be found here in ASIC’s Media Release and Report 459.
ASIC expects the industry will address these issues and intends to monitor advice licensees with respects to the gaps in cover identified.
The investigations highlights the importance of AFS Licensees to ensure that their PI policies meet the requirements of RG 126 as not all PI policies are the same.