Print Post Approved PP255003/00299
Vol.25 No.12 | April 7, 2011 | $6.95 INC GST
The publication for the personal investment professional
www.moneymanagement.com.au
BIG SUPER FUNDS LOOK TO INCREASE ADVICE: Page 5 | MARKET VOLATILITY: Page 24
Improve PI risk modelling: FPA By Caroline Munro THE Financial Planning Association (FPA) would like to see a better model used for pricing individual risk that would potentially bring down the costs of professional indemnity (PI) insurance, according to FPA chief professional officer Deen Sanders. The hardening of the PI insurance market has continued over the last few years, and the easing of certain requirements by the Australian Securities and Investments Commission (ASIC) has done nothing to bring down the cost of premiums, said Sanders. He addded that PI premiums in the last year alone have gone up between 10 and 20 per cent, even though there has not been the same level of claims activity. He also noted that since the inception of the FPA’s PRO PI service there had been no claims by members. “There is very little pricing for individual business risk, which is the model that we would like to see,” he said, adding that the FPA was disappointed w i t h t h e PI i n s u re r u n d e r w r i t i n g marketplace. “It’s much more of a blanket pooling approach, so all players
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Those practices that breach the law and go into involuntary administration could be catered for by a broader industry pool rather than needing to be met by a PI policy. - Deen Sanders
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Deen Sanders seem to be tarred with the same brush.” But Mega Capital managing director Michael Gottlieb said that insurance pricing went through cycles, adding that the last few years had seen a hardening of the market due to high claims frequency and severity. “We’re starting to see that cycle ease and we’re certainly not seeing the same level of increasing rates that we’ve seen over the last two years,” he said. He argued that risks were assessed
SMSFs not to be taken lightly By Chris Kennedy
INVESTORS should have a good reason to start up a self-managed super fund (SMSF) and have a significant starting balance. Otherwise, they should be in an industry or retail fund, or a managed fund, according to several industry commentators. The head of wealth management at HLB Mann Judd Sydney, Michael Hutton, said his firm generally looked at about $400,000 as a minimum starting balance. There needed to be a weight of money or a weight of money flowing in to start an SMSF, along with a specific reason, such as a desire to hold a specific investment that would not be available in a large fund, Hutton said. Clients with large balances who did not wish to be highly involved might be better off in a managed fund, although benefits included
Michael Hutton the extra flexibility around contributions caps for SMSFs with more than one member, he said. Chant West principal Warren Chant has said in the past that the minimum starting balance for an SMSF should be $1 million, based on the fact that a chief reason to start an SMSF would Continued on page 3
on an individual basis within parameters and that generally all forms of insurance were based on a pooling methodology. “This is arguably the only way that i n s u re r s c a n b u i l d u p a s u f f i c i e n t premium pool to pay claims,” he said. Gottlieb explained actuaries developed a model based on the claim activity in a sector, and then determined the premium amount required from that industry to satisfy the claims.
MARGIN LENDING
Diagnosing risk MARGIN lending has been under the hammer since the global financial crisis. The collapse of Storm Financial at the start of 2009 triggered a flurry of regulation, and is still sending shockwaves through the sector. As a result, growth in the sector is stagnant, with advisers and investors shying away from the perceived high risks associated with margin lending products. While industry figures have welcomed the new legislation, many also believe the sector is unlikely to see significant growth within the next 12 months. Instead, it is hoped the regulations will lead to a more focused and targeted approach to margin lending for educated investors who want to accelerate their wealth. FULL REPORT PAGE 16
“Generally this results in a range usually expressed as a percentage of revenue, and it is the role of the underwriters to determine the risk profile of each individual business and therefore apply the appropriate rate within the actuarially determined band,” he said. “There is pooling which may not be a perfect solution, but practically I’m not sure that there is another way.” Sanders said an industry compensation scheme might “address those clear market failures that have tended to discriminate against financial planning practices”. “Those practices that breach the law and go into involuntary administration could be catered for by a broader industry pool rather than needing to be met by a PI policy,” he said. Gottlieb said it would make a material difference if insurers had to pick up fewer claims, but he questioned how the scheme would be structured. He said it would make sense during periods of low claims activity. “But when the cycle turns, claims can be severe and frequent, and that’s what we’ve had in the last two years,” he said.