In some cases, independent financial advisor (IFA) firms do not only need employer’s liability insurance, but they also need professional indemnity insurance for financial advisors. This insurance will give them financial protection that general liability insurance cannot give.
Professional indemnity insurance (PII) is not a new product in the insurance business. The starting point of the PII development dates back to the 1700s in London. Later on, in the 1980s, UK-based financial advisors must have professional indemnity insurance for financial advisors.
What is Professional Indemnity Insurance for Financial Advisors?
The meaning of professional indemnity insurance is a type of liability insurance that protects professional advice individuals or companies, such as software developers, law firms, and medical professionals, from paying the defending cost when clients make a negligence claim.
In other words, this insurance covers professionals when they make particular mistakes while running their business. In the case of professional indemnity insurance for financial advisors, this insurance product is designed solely for financial advisor firms and individuals.
This insurance offers financial protections for breaches of professional duties, civil liabilities, professional negligence, and omissions or errors.
· The Importance of Having Professional Indemnity Insurance
Independent financial advisors (IFA) are a high-risk profession. IFA firms are exposed to various risks while providing financial advice to their clients. When they unintentionally perform negligence or inaccurate advice, their clients may take legal action against them.
Consequently, IFA firms must spend a large amount of money to defend themselves. Moreover, these errors and negligence may cause them to pay a certain amount of compensation to their clients.
To avoid these financial losses, IFA firms must have professional indemnity insurance for financial advisors. Having this insurance will give them several advantages.
- It allows professional advisors to have peace of mind while performing their job.
- It provides financial assistance while IFA firms face allegations.
- This insurance helps IFA firms save their reputation while they are facing allegations.
· FCA Requirements
FCA or financial conduct authority demands that all IFA firms have professional indemnity insurance. FCA requires the IFA firms to have this insurance policy without exclusions or conditions.
Moreover, FCA set the minimum limit of professional indemnity insurance for financial advisors. How much is the minimum coverage limit?
- $1,234,644 for a single claim
- $1,827,273 in aggregate
· The Risk Levels of Financial Advisor Activities
A particular financial advisor activity has a higher risk level than the others. The risk level will affect the rates of professional indemnity insurance for financial advisors. Insurance companies commonly have these views regarding the IFA professional activity risk levels.
1. High Risk:
- Tax Mitigation
- Corporate Finance
- Mergers and Acquisition
- Unregulated Investment
- Individual Investment over $281,950.
2. Medium Risk
- Estate Planning
- Investment Advice
- Home Equity Release
- Income Draw Downs
· Professional Indemnity Insurance for Financial Advisors: The Cost
How much professional indemnity insurance cost? Many factors affect the rates of professional indemnity insurance for financial advisors.
Aside from professional activities, other factors, such as business size and business turnovers affect the premium calculation. IFA firms that have higher exposure to a potential claim will spend more cost on professional indemnity insurance.
The number of partners and past product legacy issues also affect the insurance rates. Moreover, IFA firms with many claims in the past will likely get higher professional indemnity insurance rates.
They must describe their high-risk professional activities in detail if they want to get competitive rates. In general, the rate of IFA professional indemnity insurance is between 1% and 5% of the turnover.
For more info about the cost, IFA firms can ask for quotes from insurance companies. They can also do it via professional indemnity insurance brokers.
What Does Professional Indemnity Insurance for Financial Advisors Cover?
Professional indemnity insurance for different professionals covers different protections. For financial advisors, it covers:
- Defense Costs
- Civil Liability or Professional Negligence
- Investigation Costs and Regulatory Awards
- Libel, Slander, and Defamation
- Loss of Data or Documents
Proposal for Professional Indemnity Insurance for Financial Advisors
IFA firms must make an insurance proposal when they apply for professional indemnity insurance for financial advisors. In writing this proposal, IFA firms must create a good impression on the underwriter. Below are several details IFA firms must write on the insurance proposal.
- Fee Income or Total Commission: IFA firms must write their fee income and total commission clearly and accurately. This aspect presents a clear risk exposure indication.
- Complaints and Claims History: Informing insurers know the firms’ complaints and claims history allows them to get competitive rates. In presenting the history, IFA firms must also write changes and measures that they do to prevent a recurrence.
- Compliance: IFA firms must provide insurers with enough details on internal compliance functions.
- Client Documentation: Particular documents will show the quality of the IFA firms’ audit processes and services. Some documents the firms must present in the proposal are terms of business, engagement letters, fact finds, and reports.
- Business Split: This detail is about high-risk professional activities that the firms perform.
- Personnel: This information contains the team’s quality concerning the qualifications, training, and experience.
- Internal Risk Management: It is about the firms’ risk management system in defending claims. Those who have a strong system will look more favorable in the eyes of the insurers.
Broker Assistance for Applying for Professional Indemnity Insurance
Most IFA firms use the assistance of professional indemnity brokers in applying for professional indemnity insurance. This assistance will give them some benefits.
- Professional indemnity brokers will help IFA firms save on professional indemnity insurance rates.
- Brokers will ensure that IFA firms get adequate protection from professional indemnity insurance.
- Brokers help IFA firms in making professional indemnity insurance renewals.
- Brokers assist IFA firms from the start, such as writing the proposal, to the finish.
The law does not require professional indemnity insurance for financial advisors. However, FCA recommends that IFA firms have this insurance at a particular minimum coverage. Therefore, they have protections in case they perform unintentional negligence and errors.
The rates of professional indemnity insurance depend on several factors, such as professional activity risk level, turnover, and business size. In applying for this insurance, IFA firms can ask for the assistance of professional indemnity insurance.