Moonstone: PI in the sky

Way back when, when Wolraad Woltemade and I joined the industry we were taught that “Insurance” provides for eventualities that may occur and “Assurance” for those that will happen.

A lot of waves have washed over the rocks since then, in a manner of speaking, and things are not that simple anymore, yet at the bottom of it all lies our role as providers of peace of mind to our clients in terms of matters financial.

But have you stopped to think about yourself and your own business?

The following letter received from David, one of our avid readers, contains some interesting perspectives:

We know what has happened in the States and other countries where Professional Indemnity (PI) cover has become so expensive that many medical doctors are no longer able to pay for it and have therefore taken the decision to face the consequences in their personal capacity.

But what are we going to do in our industry if trends continue the way they appear to be going in South Africa when the advent of FAIS has given some members of the public (and I state it advisedly) a false sense of security? We all know what opportunist complainants are doing.

When the time comes for FSPs to renew their PI cover, insurers call for information that borders on intimacy. The questionnaire the applicant is required to complete delves deeply into a myriad of aspects of the company’s past claims experience as well as countless other risk-related items. If one responds to the requirements as one is indeed compelled to do, then one must also think ahead and consider what might happen to us in future.

The point of my comment is that it is a condition of FAIS that the FSP must have adequate PI cover in place. Fair enough. But what if the incidence of insured and non-insured complaints received over the years by the FSP (they all have to be declared at time of renewal of PI policy) causes the insurers to become so jittery that they push up the price of premiums to unrealistic and unaffordable levels, as recent evidence indicates could well be the case? The direct answer is simple: no PI cover, no compliance with the requirements, and therefore no license. But in practice that is not a solution.

What may be the solution is for FSPs, their official voice (please let’s have one!) and the insurers not to meet and pass resolutions, but to take action now and resolve these issues before they hit us between the eyes. For goodness sake, let’s not merely follow what some of our international colleagues have done.

Thank you, Paul, and your Team for your wonderful efforts in support of the compliance profession in our country.

Let me please clarify a couple of points before some guys allow their hearts to attack them:

1. PI cover is not compulsory for all – yet. Some FSPs like Category II license holders are required to have PI cover, as are those compelled by legislation other than the FAIS Act. There have been rumblings for some time now by the FSB about making it compulsory, but that has not happened yet.
2. The basic premise of insurance is for many to pool resources and share risk, thereby reducing the cost through economies of scale. If all were compelled to join it could actually lead to a reduction in premiums.
3. As with normal insurance, prevention is better than a claim, if you will excuse my paraphrasing. Those who manage their risk better will no doubt benefit in the form of reduced premiums.

The way to manage risk is to make sure that you comply with the prescriptions of all the legislation applicable to your particular business entity. Like with insurance, you can get away cheaply if you choose, provided you are prepared to live with the consequences.