In more recent times PII conditions have begun to ease across the entire insurance market for professional services firms. In the financial advice sector, new markets showing interest in advisers has resulted in existing providers being compelled to review their approach to pricing due to this increased competition. This has had a very positive impact so the conversation for advice businesses has now moved to “what am I getting” instead of “what can I get”.
One particular area of focus for many has been excesses or retention structures. They aren’t all the same and can operate in a profoundly different way with devastating consequences for the wrong advisers.
Excess Per Claim
An excess is typically the amount the policy holder is expected to bare of any loss before the insurer will contribute. When a claim occurs, it’s reasonable to expect that this is the amount that will need to be paid on any loss.
Advisers can be unique however as it’s not uncommon that, from the same or similar advice, many clients can be impacted. These causes can be product advice or recommendations associated with a failed managed investment scheme or similar.
There are many cases where insurers respond to a large number of complaints associated with similar advice. The more recent case of Dixon Advisory is a great example of how large numbers of investors can be impacted at the same time.
Excess Per Claimant
These operate very differently. An excess per claimant condition means the policy will apply an excess to each claimant or impacted client in a single claim. So, in the event where multiple clients are impacted by a single originating cause, an excess is applied to each claimant. The outcome can be significant given that excesses for advisers can range from $10,000 for small, single adviser firms to as much as $100,000 for firms with revenue up to 15m.
In a scenario where there are 15 or more impacted clients, the best case scenario based on the values set out above is $150,000 or 15 clients multiplied by 10,000, to as much as $1,500,000, or 15 multiples for $100,000 for larger firms carrying a 100,000 excess on their policy.
Its common for advisers to have the false comfort that the excess is their maximum exposure when in fact, it could be many, many times more significant. What makes this all the more challenging to navigate is the language in PII policies can be extraordinarily subtle in the clauses that govern the operation of the excess. This is often misunderstood by advisers and the brokers who don’t have expertise in this space.
In saying that, there are a place for per claimant excesses but generally only where there is a discussion on the exposure and risk profile of the adviser and the practice. The advice being provided, product selection and the pros and cons are fully considered. In the same way that high risk investment products are often appropriate for some investors, per claimant excesses can work. These decisions should however, be complemented with strong and thorough advice form the insurance broker recommending the product.
For further information regarding these, or any other coverage queries, please contact Numerisk on 1300 001 283 or at enquiry@numerisk.com.au or visit our contact page.
Numerisk Pty Ltd (ABN 93 660 217 845) is an Authorised Representative (001298428) of EBN Holdings Pty Ltd ABN 24 635 396 306 AFSL 518220. This information contained in this article is general in nature and should not be relied on as advice (personal or otherwise) because your personal needs, objectives and financial situation have not been considered. Before deciding whether a particular product is right for you, please consider your personal circumstances, as well as any applicable Product Disclosure Statement, Target Market Determination and full policy terms and conditions, available from Numerisk on request. All representations in this article in relation to the insurance products we arrange are subject to the full terms and conditions of the relevant policy.