Advisor associations developing self-funded E&O plans
Two prominent advisor groups, Advocis and Independent Financial Brokers of Canada (IFBC), are working independently of each other to create self-funded errors and omissions insurance (E&O) plans for their members.
Advisor association Advocis is sponsoring research into the creation of an E&O group fund to cover the initial costs of investigation and payment of claims and expects to have a completed game plan before June. IFBC is doing its own research. Both expect to launch their programs at the 2005 renewal of their current E&O policies.
Both groups are working with their current E&O brokers and insurers to see if they will take on the new plan. AON Reed Stenhouse is the broker for Advocis, while ERC is the insurer. At IFBC the broker is Willis, and the insurer is AIG.
In both cases, the plan is being designed for members only. In fact, John Whaley, executive director at IFBC, clearly notes the fund will in part be used to help draw in membership. At Advocis, the feeling is much the same, but the plan designers themselves are hoping the fund will one day develop into a national insurance pool available to all life insurance advisors.
Lawrence Geller, founder and owner of the For Advisors Only chat list and L.I. Geller Insurance Agencies, is one of four people on the committee reviewing the development of the Advocis plan. He says they will be in a position by late spring to say whether the project should go ahead or not.
There are still a number of factors to verify, but by and large the work is done, and Mr. Geller’s personal view is that the fund is viable. In fact, he estimates that the fund would have critical mass even with fewer members than are currently insured under the Advocis E&O policy.
Brian Mallard, Chair at Advocis, did not return calls from The Insurance Journal, but a representative confirmed the plan would only be available to members across Canada. Further, CFP and CLU designated members will pay a discounted price for the coverage.
A pre-emptive strike
Mr. Geller says the program is a pre-emptive strike against future shocks to the P&C industry. Shocks like major natural catastrophes or events like 9/11 often result in insurers withdrawing from less profitable lines of business, and the life advisor E&O sector has been far from rewarding.
Initially the plan will start as a fund with an insurer taking on surplus risk. Participants will pay a premium fee that will be split partly to establish a cash reserve for the fund, and partly to pay the regular E&O insurer that will cover the excess of claims beyond the level provided for by the plan.
There will be two levels of insurance to back up the plan. One level will have an insurer provide coverage for the cost of individual claims after a specified level is met. The second level will see regular insurer coverage kick in when the total aggregate limit of the reserve is reached.
Eventually, assuming that claims costs are controllable and that the fund reserves have grown sufficiently, the plan will become an insurance pool. Designed to exceed the demands of every provincial regulator, it will not reduce premiums right away, but ideally it will stabilize them, according to Mr. Geller.
On the IFBC side, Mr. Whaley says the concept is very attractive, but the real challenge is finding an insurer for the fund in the midst of a tight market.
IFBC’s total E&O policy will be regular insurance as far as the regulators and broker are concerned, says Mr. Whaley, but the E&O fund will pay the initial cost of a claim, including the cost of investigation. The idea is to help contain the costs of premiums both for advisors, and for insurers. Many times an insurer will settle smaller claims simply because it costs less to do so than to defray the costs to investigate and contest the claims. The fund would remove a portion of that responsibility from the insurers and put it into the hands of the fund managers.
“We might have a better capacity to investigate claims where we could defend ourselves better,” explains David Barber, president of the IFBC. While insurers tend to weigh the costs of investigations against the costs of just settling, advisors will tend to focus more on the actual cases, he explains.
For the moment, the IFBC plan designers are trying to set up a model where the first $50,000 of claims costs would be covered by the fund. Mr. Whaley could not say what an aggregate limit of claims might be.
As far as critical participation mass goes, Mr. Whaley figures that the 2,000 or so IFBC members registered for the current plan would be enough.
Mr. Barber says this type of idea is probably the beginning of a trend in the industry, Mr. Whaley agrees, saying the strategy is a conservative one, and that insurers will likely be pleased to hand off administration for those smaller claims.
Too little, too late?
The Investment Funds Institute of Canada’s (IFIC) John Murray, vice-president for corporate affairs and general counsel, and Keith Costello, vice-president for information, education, and member services, both say the plans are too little, too late. Mr. Costello feels the market is already correcting, so demand for that sort of plan will be less.
Had the plans been presented 18 months ago, says Mr. Murray, the answer might have been different. He suggests that perhaps the idea is one whose time has come and gone.
The two divulge that IFIC has already had an analysis of this type of model done by broker Marsh Canada. At the time, they were told they would be unable to reach the critical mass needed to support the plan. They just couldn’t get cheaper rates than what already was available.