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While errors and omission (E&O) insurance premiums in countries such as the U.S. and the U.K. have increased significantly during the pandemic, the Canadian E&O market for independent financial advisors and small advisory firms has remained relatively stable. And while there hasn’t been any substantial rise in claims activity or changes to the E&O coverage itself, there’s been one exception.
Advisors who opted for a cybersecurity rider on their E&O policy likely saw their premium soar by as much as 50 per cent, says Danish Yusuf, founder and chief executive officer of Zensurance in Toronto, a national insurance brokerage that offers E&O policies to independent financial advisors and financial planners.
“Cyber is where all the claims are,” he says. “Advisors hold sensitive information about their clients and they can be prime targets.”
The pandemic lockdowns and restrictions, which caused many to pivot to makeshift home offices, exacerbated this fact.
“Once everybody started working from home, it was harder to have the same types of controls on your network as you did in the office,” Mr. Yusuf says. “As a result, insurance companies are raising their rates and putting more restrictions in place in terms of who can get the cyber coverage.”
Roberta Tasson, partner and broker for The Magnes Group Inc. in Oakville, Ont., notes that a cyber insurance add-on to an advisor’s E&O policy – if available – has increased from $100 annually a few years ago to the premiums doubling or tripling, depending on the program.
“Over the past three years, the cost of cyber insurance has skyrocketed across all industry segments worldwide, and financial advisors in Canada are not immune to these rate increases,” she says.
“Advisors do recognize the ever-increasing business operational exposure that cyber risk presents, and we are seeing more advisors purchase the cyber insurance add-on in comparison to pre-pandemic times.”
Why many are not opting for coverage
But a cybersecurity add-on to an E&O policy has been a slower uptake for independent, individual advisors who operate their own businesses.
“The increased additional cost is coming out of their own pockets, and the limit for this extension is typically $100,000,” Ms. Tasson says.
“Some financial advisors may wish to carry $1-million of cybersecurity coverage, but this then results in minimum annual premiums starting at $3,500 for a standalone cyber policy outside of the E&Q advisor program, and subject to proper risk protocols in place.”
Mr. Yusuf has also found only about a third of advisors who buy the E&O policies are opting in for a cybersecurity extension.
Besides the increase in price, some advisors may not want to go through the extensive underwriting requirements, he says.
For example, advisors need to prove they have multi-factor authentication, firewalls, encryption, and phishing training for employees.
“Those are the big qualifiers and if you don’t have those you may not get cyber coverage from anyone,” Mr. Yusaf says.
He adds that advisors who cannot afford much should consider getting even a small cybersecurity face amount to the E&O policy – say, $25,000. Beyond support for claims, policyholders also get expert advice for cyber prevention and detection.
“Most policies give you access to cybersecurity experts,” he says. “So, if you have a question about whether you were hacked, you can speak to a panel of experts to help you figure out what happened, including a plan of action.”
How to mitigate insurance costs
One way for advisors to keep E&O premium costs down may be to purchase the policy through a professional association.
“You have the benefit of thousands of advisors purchasing insurance through one plan, providing volume in premium to an insurer which then results in more competitive rates and broader coverage being offered,” says Ms. Tasson of Magnes Group, which manages E&O insurance policies for members of Independent Financial Brokers of Canada.
Jack Mazakian, vice-president and principal broker at Advocis Broker Services Inc., says its E&O rates for The Financial Advisors Association of Canada – known as Advocis – members have been stable for the past four years.
He sees the best way for advisors to mitigate costs is to examine all the costs and value behind the fees closely. In other words, shop around.
“You have to know what you’re buying and who you’re buying it from,” he says.
“There are cheaper policies, but is the coverage you’re buying comparable to other programs? Does it offer similar limits of liability? Are you getting the best kind of service if a claim occurs?” are questions to consider.
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