Professional Indemnity for AFS Licensees

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1 Professional Indemnity for AFS Licensees Challenges and Opportunities Geoff Atkins August 2007 Finity Consulting Pty Limited 2007 This presentation is intended as a brief guide to Professional Indemnity for AFS Licensees. It is by no means comprehensive and therefore is not intended to cover all details of the compensation requirements as set out by ASIC. Finity Consulting does not warrant that the information contained here is correct. It cannot be relied upon for decision making. Further advice or clarification can be sought from our consultants. This submission is made in the public interest. It does not advocate on behalf of Finity, any of Finity s clients or any stakeholder group. Finity takes an interest in a range of initiatives relating to the insurance industry, and this is one. Our key contacts are Geoff Atkins Estelle Pearson

Finity Consulting does not warrant that the information contained here is correct. It cannot be relied upon for decision making. Further advice or clarification can be sought from our consultants.

2 Introduction ASIC has issued a Consultation Paper on the use of Professional Indemnity (PI) insurance to meet the requirements of holders of an Australian Financial Services (AFS) licence to compensate retail clients Finity has made a submission to ASIC, and sees this as a significant opportunity for insurers to adapt products to meet evolving needs. Slide 2

(AFS) licence to compensate retail clients Finity has made a submission to ASIC, and sees

3 Highlights Insurance is only a partial solution for consumer protection. It can be (and usually is) regarded as a good enough solution. Regulation should aim to improve the good enough solution without making it so difficult that the commercial insurance market cannot provide a viable product. Slide 3

Regulation should aim to improve the good enough solution without making it

4 Covering Dishonest Conduct One of the main problems is that conventional PI insurance does not cover dishonest conduct of the insured. Insurers can, and should, amend the product to protect the consumer against dishonest conduct while retaining recovery rights against the insured. Conventional PI Honest Mistakes Dishonest Acts Fidelity Type Cover Combined Cover Slide 4

Insurers can, and should, amend the product to protect the consumer against dishonest

5 Covering EDR Schemes Insurers can and should extend the product to cover EDR schemes. The insurer needs the opportunity and right to defend the claim, and this can be built into the insurance contract and the EDR procedures. Some insurers may not regard some EDR s as operating appropriately. If so, this should be resolved through governance of the EDR Scheme, not through denial of retail consumer claims. Slide 5

insurance contract and the EDR procedures.

6 Policy Limits and Excesses Policy excesses contribute to the incentive of insureds to prevent and mitigate losses, and should be encouraged. An excess up to 3% of anticipated annual revenue should be automatically accepted. Higher excesses should be approved by ASIC. Policy limits as per ASIC s paper are sensible. In practice, the per claim limit should be a minimum of $500,000. Minimum limit per claim: $500,000 Minimum annual aggregate limit: Revenue under $1m $2,000,000 Revenue $1m to $10m 2 x revenue Revenue over $10m $20,000,000 Slide 6

Higher excesses should be approved by ASIC. Policy limits as per ASIC s paper are sensible.

7 Costs in Addition or Costs Inclusive The limit per claim should be expressed with defence costs in addition. A sub-limit on defence costs of 50% (or more) of the per claim limit should be acceptable. The annual aggregate limit may be inclusive of defence costs provided it is at least two times the per claim limit. Slide 7

A sub-limit on defence costs of 50% (or more) of the per claim limit should be

8 Consistency with Professional Standards Legislation ASIC should work with the Professional Standards Council to produce consistent requirements. PSC can then be the lead approver of PI for those licensees that are a member of a Professional Standards Scheme. This approach also encourages industry groups to take an active involvement. Slide 8

PSC can then be the lead approver of PI for those licensees that are a member of a

9 Run-off Cover Run-off cover is one of the main gaps that cannot be adequately filled in the commercial PI market. ASIC should: not impose run-off obligations on insurance that are contrary to viable underwriting practice consider requiring EDR s to provide back up consumer protection in an uninsured run-off situation, funded by industry levy encourage industry groups to include run-off in negotiated group insurance arrangements Slide 9

ASIC should: not impose run-off obligations on insurance that are contrary to viable underwriting practice

10 Commercial Opportunity Most AFS licensees buy PI insurance now, and most will wish to continue. An extended cover, provided it can be suitably underwritten and priced, is good for insurers and AFS licensees alike. By actively seeking to meet the evolving market needs, insurers will improve their reputation and opportunities in the market place. Slide 10

An extended cover, provided it can be suitably underwritten and priced, is good for

Compensation and insurance arrangements for AFS licensees

REGULATORY GUIDE 126 Compensation and insurance arrangements for AFS licensees March 2008 About this guide This guide is for Australian financial services (AFS) licensees and representatives, their advisers