The advocis protective Association is making the transition from a traditional insurance plan to a self-funded errors-and-omissions model. The changeover is expected to provide advisor-members with a more stable plan when it is finally in place, probably by late April 2006.

Under the plan, a portion of member premiums will go to the APA’s E&O insurer and another portion will go to the APA to cover members’ deductibles and the annual total of claims up to $3 million. The self-funding plan should make it more attractive to skittish reinsurers and less vulnerable to the impact of catastrophic events on the volatile insurance market.

“We’re trying to create stability. We want to make sure plan members know the insurance is going to be there, and they’re not going to see serious fluctuations in premiums,” says John Martin, the APA’s chief operating officer, marketing.

The APA is an Advocis subsidiary that was formed to supply E&O insurance to advisors. E&O insurance has become harder to get and more expensive as insurers have exited what is a tough business.

“We see a large market of financial advisors across Canada,” Martin says. “Our ambition is to be the pre-eminent provider of E&O insurance for financial advisor professionals in Canada, covering individuals who are licensed for life insurance and mutual funds, and both registered reps and fee-only practitioners.”

By August, 23% of APA plan members were new members, he says. The APA’s E&O plan is available to both members and non-members of Advocis.

Currently, APA premiums and member claims go directly to Advocis’s insurer, Kitchener, Ont.-based Economical Mutual Insurance Co. With the help of its new broker, Toronto-based Willis Canada Inc. however, the APA is designing the self-funded plan.

Under the new plan, says Martin, the APA will pay the first $250,000 of a specific E&O claim, and an annual total for all claims of $3 million. If a claim exceeds $250,000, or the annual claim amount exceeds $3 million, the insurer and reinsurer will step in to pay the balance, says Martin.

Based on actuarial projections, says Martin, it is unlikely that the thresholds would be exceeded. The model is similar to E&O plans developed by lawyers’ and doctors’ organizations. “It’s attractive to a reinsurer because it won’t be paying the first dollar,” says Advocis’s COO, Terry Taylor.

The reinsurer is Aspen Re of London, formally Aspen Insurance UK Ltd. Both Economical Mutual and Aspen Re are aware, and supportive, of the switch to a self-funded plan in 2006, says Martin.

Three goals

Meanwhile, the APA has been working on three goals. The first, says Martin, is to redesign and improve the E&O plan so it provides more suitable coverage for financial advisors, regardless of whether they are licensed to sell mutual fund, insurance or securities . The rate for $5 million in coverage will drop to $1,100 in 2005-06 from $2,400 in 2004-05 .

The second is to find a new broker to help the APA communicate its needs to the reinsurer, which it has done.

The process should be completed during the first quarter of 2006, at the latest, which will fulfil its third goal of getting the plan in place.

The move to a self-funded plan will give the APA increased flexibility as its reserve fund grows, Martin and Taylor say. For example, it could result in lower premiums for members who have more than one designation or a zero-claims record.

The APA will also look at revising its coverage as new products are brought to market.
“In this regard, we want to work closely with corporations’ compliance departments. It is in our mutual interest to ensure that products that will be offered are properly vetted and that advisors understand they are restricted to the approved listing,” says Martin.
“The APA wants to be able to determine that a product a company is offering matches what advisors are marketing.”

A fundamental part of the move to a self-funded plan will be “to help advisors understand what they can do to avoid risks,” says Martin.

The changeover also fits with Advocis’s intention to raise the professional bar among financial advisors, says Taylor. Advisors who follow the practices set out in the Advocis Best Practices Manual could pay reduced premiums, Martin says.

Advocis’s value

Although non-Advocis members will be able to enrol in the APA plan, he says, the APA hopes that they will learn the value of Advocis with regard to education and accreditation, and join Advocis.

@page_break@Lawrence Geller, president of L.I. Geller Insurance Agencies Ltd. in Campbellville, Ont., has been a key player in getting the self-funded plan going. He sits on the APA board of directors.

Following the terrorist attacks on Sept. 11, 2001, the insurance market took a nosedive and E&O insurance was one of the lines of insurance that was adversely affected, says Geller. Several reinsurers got out of the E&O market and premiums jumped. This inspired some Advocis members to establish the APA, with the goal of developing a self-funded plan.

The key attraction for financial advisors, he says, is the element of stability that a self-funded E&O plan will offer, especially for insurance advisors who must have coverage under provincial insurance regulations.

Although the Mutual Fund Dealers Association does not mandate E&O insurance, says Geller, there are frequent, if small, claims against advisors involving mutual funds.
Insurance claims are often large but infrequent, he adds. The combination will make a self-funded plan attractive to reinsurers, he says.

“We should have done this years ago, but no one thought of it. When the premiums were much lower, no one thought much about it,” says Geller.

The new self-funded model is expected to make a substantial difference, he adds, especially in a “hard market” that is affected by some catastrophes.

APA members will not be vulnerable to weather disasters nor to the whims of reinsurers, Geller adds. IE