Advice practices lack robust risk management systems, which is adding pressure to professional indemnity (PI) insurance premiums, according to two experts in the sector.
PI options in the industry have reduced with AIG ceasing renewals this month, and the shrinking supply combined with rising premiums has been a well noted issue in the industry.
Easy Monitor managing director Leigh Anoos tells Professional Planner current methods used by licensees to oversee their authorised representatives are not robust enough to provide any insights.
“That means they are risky to a PI insurer,” she says. “If you’re running all your interactions via email, excel spreadsheets and folders, that’s ineffective. It requires way too much manual handling.”
Anoos says firms need to show they have robust risk management regimes that demonstrate they have proper oversight.
“With any insurance you have to reduce the risk to make the premiums more affordable. Not many are embracing that opportunity and therefore having these high-level premiums. Insurance across the board is rising.”
Getting a handle on it
Anoos says complaints handling is a large part of the risk management process and complaints can quickly turn escalate into claims if not handled effectively.
“What the underwriters say is that too often complaints in the initial phases are not properly handled. There’s not enough evidence of what has happened and that’s the opportunity to keep the complaint from escalating.”
According to Anoos, the five common breakdowns of AFSL oversights are lack of board oversight, insufficient complaints handling, poor documentation of investment committee decisions, unmanageable rapid growth, and failure to implement cyber security measures.
Professional Insurance Managers founder Farrel Datt says staff that are rewarded for raising issues is an important part of risk management.
“Businesses that make PI risk a prime focus tend to do it very well,” Datt says. “Companies that do that well tend have this fluid way of regularly addressing small issues and those small issues never become big issues.”
Datt says using technology is another way of actively reducing PI risk and the best prepared companies he’s encountered have taken risk management the “next level”.
“Every meeting is recorded,” Datt says. “The Statements of Advice is only one piece of advice the clients receive. There are multiple conversations, emails… a lot of context missing from SOA that is included in conversations or emails.”
Because of this, Datt says, companies that have better organised recording keeping processes have a much healthier relationship with the client.
“That reduces their PI risk. If you have a formal way of recording those informal or less formal pieces of advice there’s risk things will go off track with the client.”
Even from an advice perspective, Datt noted that inappropriate advice and lack of diversification is the number one claim type at AFCA tribunals.
“Include that in actively reducing your PI risk,” he says. “When you give advice make sure diversification is top of the advice – I can’t believe we have to say this. Now is not too late, have this meeting with your client and discuss the lack of diversification get your clients to be on board to in place a strategy.”
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