Professional Indemnity Proposal Form

					           The Right Professional Indemnity Cover



A Practical Approach to Obtaining
Professional Indemnity Insurance
 Prepared by:
 Michael Gottlieb of Mega Capital Pty Ltd –
 A Specialist Professional Risks Insurance
 Brokerage

 7 October 2004
Agenda


Trends in the Australian PI Market Place

The Submission: What drive premiums upwards
and how to buck the trend

The Policy Wording: Things to Look Out For

Claim Examples

Conclusion

          Mega Capital Pty Ltd: ABN 78261843713 (AFS License No:238549)
          T: 1300 850 051 F: 1300 850 065 E: fp@megacapital.com.au
Agenda


Trends in the Australian PI Market Place

The Submission: What drive premiums upwards
and how to buck the trend

The Policy Wording: Things to Look Out For

Claim Examples

Conclusion

          Mega Capital Pty Ltd: ABN 78261843713 (AFS License No:238549)
          T: 1300 850 051 F: 1300 850 065 E: fp@megacapital.com.au
               In the past 5 yrs, PI premiums have increased by
               over 115%


                                            Annual Change in Nominal and                                                        Commentary
                                                Real PI Premium (%)
                                                                                                                               1994 was the last peak
                                  60                                                  175                                      in the insurance cycle
 Weighted Average Annual Change




                                                                                            Inflation Adjusted Premium Rates
                                                                                                                               The PI market
                                  40                                                  150                                      softened considerably
                                                                                                                               thereafter with
        in PI Premium (%)




                                                                                                                               premiums falling for 4




                                                                                                      (Base Rate '94)
                                  20                                                  125                                      consecutive years
                                                                                                                               It took 8 years (2002)
                                   0                                                  100                                      for inflation adjusted
                                        94 95 96 97 98 99 00 01 02 03 04                                                       premiums to return to
                                                                                                                               the levels of ’94
                                  -20                                                 75
                                                                                                                               From June ’01 to June
                                                                                                                               ’03 premiums
                                  -40                                                 50                                       increased on average
                                                                                                                               by 103%



Source:
2003 JP Morgan/Deloitte General Insurance Industry Survey.
2004 JP Morgan/Deloitte General Insurance Industry Survey – Executive Summary.

                                                 Mega Capital Pty Ltd: ABN 78261843713 (AFS License No:238549)
                                                 T: 1300 850 051 F: 1300 850 065 E: fp@megacapital.com.au
The hardening was a result of reduced capacity
sustained underwriting losses and poor
investment returns

                                                                            2004
                                         Insurance
                        Factors influencing the Insurance Industry
                                               Market
            2000



                        • Reduced Capacity:
                               - Demise of HIH,
                               - Withdrawal of numerous insurers from the
                                 Aus Market place e.g. Gerling, Markel
                               - IAG purchase of CGU


                        • Industry Shocks:
                               - September 11th , Bali
                               - Declining Stock markets,
                               - Droughts/Floods/Fires etc


                        • Other:
                               - Emotional Factors lead to over-reaction
                               - Promina IPO

         Mega Capital Pty Ltd: ABN 78261843713 (AFS License No:238549)
         T: 1300 850 051 F: 1300 850 065 E: fp@megacapital.com.au
        Most industry participants believe the peak of
        the PI market has been reached

                       Insurance Cycle – Pricing Dynamics                                      Commentary
  Insurer
Profitablility                                                                            The current cycle seems to
                                                                                          have peaked and the question
           1994                                            PI Market today ?
                                                                                          that remains, is how long until
                                                                                          we see softening?
     Underwriting Profit Peaks                     Underwriting Profit Peaks –            Reduced capacity and
                                                   Combined ratio of 92%                  competition, coupled with the
        Capacity Increases                                                                focus on ROC and
                                                   Loss ratio improves
                                                                                          underwriting discipline will
                                                                                          most likely result in a
         Competition increases
                                                Premium rate rise                         stabilisation of the market
                                                                                          rather than significant
          Loss ratio begins to rise                                                       softening.
                                             Capacity Leaves / Moderates
                                                                                          Current PI combined ratios are
                     Major underwriting losses incurred                                   expected to remain on average
                     – Combined ratios exceeded 150%                                      at 92%

                                                                         Time
                                   HIH Demise
                  Premiums are unlikely to reduce substantially over the short term.
    Source:
    2003 JP Morgan/Deloitte General Insurance Industry Survey.
    2004 APIG: Professional Liabilities Market Update

                                   Mega Capital Pty Ltd: ABN 78261843713 (AFS License No:238549)
                                   T: 1300 850 051 F: 1300 850 065 E: fp@megacapital.com.au
We have started to see improving conditions for
Financial Planners

• Increased capacity and competition
   – Currently 8 insurers/underwriting agencies

• Reduced base premiums and loadings for higher
  limits of indemnity
    – Base premium for $1m LOI can be as low as 1.5%
    – Higher limits of indemnity (>$10m) more easily
      obtained
    – Insurers more willing to provide reduced excess
      levels for Ars of AFSL holders

• Ability to cover difficult to place activities
   – Discretionary Investments
   – Managed investment schemes, Margin Lending,
     Direct investments
           Mega Capital Pty Ltd: ABN 78261843713 (AFS License No:238549)
           T: 1300 850 051 F: 1300 850 065 E: fp@megacapital.com.au
Agenda


Trends in the Australian PI Market Place

The Submission: What drive premiums upwards
and how to buck the trend

The Policy Wording: Things to Look Out For

Claim Examples

Conclusion

          Mega Capital Pty Ltd: ABN 78261843713 (AFS License No:238549)
          T: 1300 850 051 F: 1300 850 065 E: fp@megacapital.com.au
The level of premium and quality of policy range
considerably between insurers and even within
insurers.

• Average premiums for $1m LOI range between
  1.5% and 5%
• Excesses range between $5,000 and $100,000
• Limits of indemnity may include a reinstatement/s
  and may be exclusive of costs
• Coverage for AR’s may or may not be included in
  the policy
• Exclusions may include: margin lending, Tax
  effective products, hedge funds, dealing in direct
  equities, discretionary investments…


          Mega Capital Pty Ltd: ABN 78261843713 (AFS License No:238549)
          T: 1300 850 051 F: 1300 850 065 E: fp@megacapital.com.au
Specific questions in the proposal trigger alarm
bells i.e LOADING factors and/or EXCLUSIONS

• Non employed AR’s
• Investment Activities
   – Direct Investments
   – Margin lending
   – Hedge Funds
   – MIS
• Business Services
   – Dealing in Securities i.e Stock broking exposures
   – High Levels of Risk Insurance
   – Discretionary Investments
   – Mortgage Broking/Origination/Management
• Perceived Conflict of Interest
• Claims History

            Mega Capital Pty Ltd: ABN 78261843713 (AFS License No:238549)
            T: 1300 850 051 F: 1300 850 065 E: fp@megacapital.com.au
Insureds, together with their broker have the
ability to influence the competitiveness of their
quotation.
•   Detailed and comprehensive submission
      differentiate your business in a ‘Covering letter’
      address areas that may concern underwriters

•   Choose the RIGHT broker
      not aligned to ONE insurer and access to range of insurers
      specialist in PI insurance and good knowledge of FP industry
      not just a ‘fax service’ and willing to go into ‘bat’ for you

•   Begin the process early
      ensure you receive your quotation well in advance of the
       renewal date
      understand the policy and endorsement wording and
      negotiate unsatisfactory clauses, where possible




               Mega Capital Pty Ltd: ABN 78261843713 (AFS License No:238549)
               T: 1300 850 051 F: 1300 850 065 E: fp@megacapital.com.au
Agenda


Trends in the Australian PI Market Place

The Submission: What drive premiums upwards
and how to buck the trend

The Policy Wording: Things to Look Out For

Claim Examples

Conclusion

          Mega Capital Pty Ltd: ABN 78261843713 (AFS License No:238549)
          T: 1300 850 051 F: 1300 850 065 E: fp@megacapital.com.au
Policy wordings differ between insurers at a
macro and micro level
           Macro                                                      Micro

  • Extent of Cover                                       • Exclusions and
     –Civil Liability vs AEO                                endorsements
     –AR’s                                                   –Gearing / Margin
                                                              Lending
     –Fraud & Dishonesty
                                                             –MIS
     –Jurisdiction/Territory
                                                             –SMSF admin
                                                             –TPA
  • Limit of indemnity
                                                             –Mortgage Broking
     –Reinstatement
                                                             –Tax Advice
     –Defense Costs
                                                             –Dealing in Equities
                                                             –Fraud & Dishonesty
  • Excess/Deductible
     –Claim vs Claimant



            Mega Capital Pty Ltd: ABN 78261843713 (AFS License No:238549)
            T: 1300 850 051 F: 1300 850 065 E: fp@megacapital.com.au
      Many AR’s are trading with inadequate
      insurance
                                   Combined vs Separate PI Insurance Policies
                               Combined Policy                                Separate Policies

                 • Economies of Scale often result            • Unlimited retroactive cover
                   in increased bargaining power                irrespective of dealership;
                   –Reduced premiums                          • Own limit of indemnity
         High
                   –Improved wording                          • Lower excesses
                   –Automatic acceptance of ARs
Benefit Per AR
                 • Retroactive and run off                    • Limited negotiating power due to
                   exposures                                    small premiums
                 • Shared Limit of indemnity                      –Standard wording
         Low
                 • Often higher excesses
                 • Insured vs Insured exposures

                                   Low                                            High

                                                     Cost Per AR



                          Mega Capital Pty Ltd: ABN 78261843713 (AFS License No:238549)
                          T: 1300 850 051 F: 1300 850 065 E: fp@megacapital.com.au
Agenda


Trends in the Australian PI Market Place

The Submission: What drive premiums upwards
and how to buck the trend

The Policy Wording: Things to Look Out For

Claim Examples

Conclusion

          Mega Capital Pty Ltd: ABN 78261843713 (AFS License No:238549)
          T: 1300 850 051 F: 1300 850 065 E: fp@megacapital.com.au
The claim below shows how the each and every
claimant deductible can impact on the insured

Claim Example 1
   This claim is an example of a class action against the Insured. The number
   of claimants involved is 35.

   A multitude of clients were advised by the Insured to invest into a
   particular trust fund. The Insured was responsible for advising clients of
   the volatility into the venture of this trust fund. The trust fund ended
   up in liquidation and the clients made complaints to the Insured about
   their recommendations to invest into this trust fund.

   Clients brought their complaints to Financial Industry Complaints Scheme
   (FICS), however FICS had no jurisdiction as Insured's dealer license was
   revoked by ASIC.

   Clients now have to bring action to the high court.

   Amount being claimed : approx $4,000,000
   Legal costs paid to date : approx $30,000



                  Mega Capital Pty Ltd: ABN 78261843713 (AFS License No:238549)
                  T: 1300 850 051 F: 1300 850 065 E: fp@megacapital.com.au
The example below demonstrates why insureds
should understand the effect of an inclusive limit
of indemnity
Claim Example 2
   Insured and their authorised representatives were covered under this
   particular policy.

   The authorised representative recommended their client into an aggressive
   investment option however it was found that the authorised representative
   was not authorised to provide this information to any investor.

   The client claims that the authorised representative did not do enough
   research into the investment and also assumed the client was an aggressive
   investor.

   After investigation, the authorised representative was acting as an agent
   for another party and not the Insured.

   Claim has not been settled but may potentially settle for $200,000.

   Legal costs paid to date : $90,000



                  Mega Capital Pty Ltd: ABN 78261843713 (AFS License No:238549)
                  T: 1300 850 051 F: 1300 850 065 E: fp@megacapital.com.au
Another Claim Example…
Claim Example 3
   Client held securities in a form of warranty. The Insured advised the
   investor to sell their security.

   The client is now alleging they suffered a loss as a result of selling
   their security.

   The specific misrepresentation made by the Insured is that they advised
   the client that the warranty would increase over the set period. This
   advice was provided as the security was being over-sold and it was likely
   the value would increase.

   The client sold the securities at a loss and were unable to buy back the
   investments as this was not a financially viable option.

   The client was advised by the Insured that they would be able to roll-over
   the security at expiration date but the roll-over was not available after
   expiry.

   Amount being claimed : approx $400,000
   Legal costs paid to date : approx $60,000

                  Mega Capital Pty Ltd: ABN 78261843713 (AFS License No:238549)
                  T: 1300 850 051 F: 1300 850 065 E: fp@megacapital.com.au
Agenda


Trends in the Australian PI Market Place

The Submission: What drive premiums upwards
and how to buck the trend

The Policy Wording: Things to Look Out For

Claim Examples

Conclusion

          Mega Capital Pty Ltd: ABN 78261843713 (AFS License No:238549)
          T: 1300 850 051 F: 1300 850 065 E: fp@megacapital.com.au

				
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Description: Professional Indemnity Proposal Form document sample