Professional indemnity insurance (PII) is a critical safeguard for advisers in the UK, but the market has faced prolonged challenges, with premiums rising in response to high claims volumes, particularly in relation to pension mis-advice and investment recommendations.
The Financial Ombudsman Service (FOS) continues to report substantial compensation claims, further pressured by its new higher compensation cap of £430,000.
As a result of these long-term structural challenges, obtaining affordable PII remains a challenge for smaller advice firms, particularly those specialising in complex advice areas such as defined benefit pension transfers.
The Consumer Duty in 2023 did not help with this, imposing, as it did, higher standards of care on financial-services firms, emphasising fair treatment and the need to evidence good outcomes for clients.
Advisers must now rigorously document their advice processes and the suitability of products, and insurers are increasingly examining these records as part of their risk assessments, bringing higher premiums for some.
Early evidence suggests the Consumer Duty regulations are also driving an uptick in claims related to legacy advice, where firms are unable to substantiate the suitability of past recommendations.
In a very similar way, this year, the Financial Conduct Authority’s Retirement Income Advice Assessment Tool (RIAAT) is also poised to significantly influence the PII landscape.
RIAAT also emphasises higher standards for assessing retirement income advice, building on findings from the FCA’s recent thematic reviews, which highlighted widespread issues with poor record-keeping, inadequate fact-finding and inconsistent attention to customer vulnerabilities.
The RIAAT seeks to address these by offering a structured framework to evaluate advice suitability, which has implications for both compliance and risk assessment by insurers.
The RIAAT requires firms to maintain detailed and accurate records of advice, including client risk tolerance, income needs and wider financial circumstances. Failure to meet these standards could lead to regulatory scrutiny and heightened claims from dissatisfied clients.
This increases insurers’ concerns about the underwriting risk for PII policies, potentially driving higher premiums or more restrictive policy terms for firms during 2025.
It is clear the RIAAT dovetails with the Consumer Duty regulations, highlighting the same issues around vulnerable clients and ensuring fair outcomes. Those renewing insurance this year need to be aware RIAAT record-keeping will be a topic of discussion with brokers and insurers during the renewal process.
Insurers are likely to require evidence of compliance with both the RIAAT and the Consumer Duty during policy renewals, further tightening the underwriting criteria.
For firms adopting the RIAAT proactively, the tool does, however, provide an opportunity to improve governance frameworks and potentially, as a result, also client outcomes. This could ultimately enhance their standing with insurers, potentially leading to more favourable terms.
The cost required in upgrading governance systems, as well as the human resources involved, do look likely to create a two-tier system.
Smaller firms may struggle to allocate the necessary resources to implement RIAAT requirements fully, which could leave them more vulnerable to increased insurance premia in 2025.
On a wider basis, the need to implement ever-more complex documentation systems could also drive further consolidation within the advice sector, as firms merge to share compliance costs.
Insurers also have work to do around RIAAT – the impact will not just be felt by advisers.
The FCA has encouraged insurers to leverage the RIAAT tool to mine for a deeper understanding of the universe of risks in retirement income advice, and the likelihood of each separate challenge. If insurers really do take the initiative to work with the RIAAT data, the result could be some interesting tailored risk-management initiatives that may also benefit advisers.
The RIAAT has a lot of parallels with the Consumer Duty in 2023. It has some benefits for advisers and insurers, but it also places pressure on advisers to consistently meet evolving regulatory benchmarks. This will, in turn, give insurers new ways and data to measure the risks they are covering.
In the short term, RIAAT may bring even more challenge to the PII insurance landscape. But over the longer term, we could see a more stable pricing system and benefits to advisers in terms of coverage availability.
Kate Albert is chief executive at Kova Professions
