PI insurers: Putting your best foot forward

IMAP’s MDA Forum in August provided managed account professionals with interesting insights from a lawyer and insurer in relation to professional indemnity (PI) insurance for MDA providers working in the managed accounts sector.

Addressing the forum in Sydney were Mike Herron – National Practice Leader, Professional and Financial Risks at Arthur J. Gallagher, and Cain Jackson – Partner at Wotton + Kearney. And in Melbourne, Stephen Hughes – General Manager Professional Services at Arthur J. Gallagher addressed the forum.

Both speakers set the scene for PI renewals, which has become increasingly difficult for MDA providers post GFC.

“Following the GFC, a number of insurers left the PI market, which has reduced competition. So, what was a highly commoditised market only a few years ago, has now become a highly contested market,” Herron said.

Speaking from a PI insurer’s perspective, Herron added that some of the big issues for PI insurers today remain around hybrids, and this concern should not be ignored by the industry.

The real challenge now is to move on from the bad experiences post GFC and encourage more insurers to return to the PI market

Cain Jackson
Jackson agreed, saying that prior to the GFC, there was a “rogue element” in the financial services industry that was mismatching products and asset allocations with client risk profiles.

“However, post GFC, we have seen greater regulation of the financial services industry, which is also creating a better, more regulated insurance sector,” Jackson said. “So, the real challenge now is to move on from the bad experiences post GFC and encourage more insurers to return to the PI market.”

Herron believed the key to this, particularly for MDA providers, was for the sector to better explain what managed accounts were and to proactively take PI insurers on a “journey of explanation”. He said by being able to articulate a strong narrative to PI insurers, MDA providers could ensure they get the most advantageous terms from them.

Herron said being able to differentiate your operating model from high risk operations can make a significant impact on the PI terms available to MDA providers.

“The most significant risk for PI insurers is the retail advisory sector. So, from an MDA perspective, you need to actively talk to PI insurers about the type of model you are using for your clients and business, including the due diligence process around this model.”

As such, Herron said it was important that PI insurers understood how various models stacked up against each other, such as:
  • retail vs wholesale;
  • advisory vs non-advisory;
  • custodial vs non-custodial;
  • less customised; and
  • diversified and compatible.
Jackson agreed. “There is a perception that removing the non-advisory function removes risk. That’s wrong, because risk remains. There’s risk in relation to compliance, investments, processes, resources, governance structures and operational framework.”

However, he added that the long-term impact of any claim/incident history can be mitigated by MDA providers improving their risk management. Jackson said that had been particularly evident over the past few years, where there had been a trend for civil liability to extend beyond the adviser to any other party involved in the investment/advice process, such as investment managers, MDA providers, as well as the MDA adviser.

“Increasingly, from a legal standpoint, where multiple parties are involved in misleading or deceptive conduct, we’re seeing liability for all these parties,” Jackson said. “If you misrepresent what you are presenting or delivering, it does not obviate you from liability.”

Jackson added that improved risk management and the tightening up of “grey areas”, including the ‘duty of care’ provisions in an MDA contract/agreement, was something PI insurers found appealing, as this reduced the chance of misinterpretations from a legal standpoint.

He believed this was one of the better ways MDA providers could ensure they get the most advantageous terms from PI insurers.

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