Insurer Security & Solvency by Peter Staddon
The first question is , with whom do we place our client ’ s risk ? We have seen in recent months consolidation within the insurer community and it is fair to say that there is potential for further insurer consolidation . Therefore , we must turn our thoughts to insurer security and the solvency of our client ’ s carriers . When we couple this with the never-ending financial pressures across Europe it does raise the question of whether our clients ’ policies are safe . Moreover , what should we be doing to ensure , as much as possible , that we have provided the client with a selection of carriers who will be around to pay the claim when the time comes ?
Why
• Brokers will have a number of insurers with whom they trade . Although brokers are not the guarantor of the insurance company we must exercise a duty of care in the selection of those markets .
• We should remember that failure of a specific insurance company and any resulting issues arising from that failure , which we are held responsible for , may not be covered under our Professional Indemnity Insurance .
• When trying to place a distressed risk we may be forced to use either a wholesale broker or a non-conventional insurance market to cover our client ’ s risk .
• When we are selecting any market , conventional or non-conventional , FSA in the past and certainly the FCA will almost certainly want to satisfy itself that our clients and customers are having their interests properly addressed .
• FSA had been looking at the financial capability of our customers . This must also be viewed to include our suppliers . Therefore we need to establish some basic facts about our suppliers . These are : o
o o
o
Country of domicile and jurisdiction for legal purposes Financial strength Its reinsurance programme [ on the larger risks ] Treasury approved in respect of insurance classes ( per Bates & Barrow 1995 )
Brokers are required to check the financial strength of the Insurer , but this may be more difficult to establish ; Quinn is a good example here , as they did not have an insurer security rating for a long time .
Although there are websites available to provide an insurer rating these are only a ‘ snapshot ’ in time . Moreover they could be out of date and not take into consideration the dynamics of their portfolio . I am sure I need not remind you that on Monday , the week before the collapse of an Independent insurance company , their financial strength was estimated as A- . By Friday they had dropped nine points to B . The market would maintain that an operating , solvent business with a credit rating of B would only have a maximum life of 5 years before its demise . In a difficult and hard market , brokers could be tempted to use markets either with no or a low insurer credit rating . These are often known as ‘ non-standard insurers ’. This term was put down by William Norris QC in a paper commissioned in 2006 . This term was specific to the following three categories :
• Insurance companies located outside the UK
• Insurance companies that are not regulated by FSA
• Insurance companies without a UK security rating
The use of these types of companies puts a greater onus upon brokers to ensure that the client has a proper and full understanding of the risks involved and has willingly decided to bear them himself . But we should also be aware that the disclosure as required by the regulator may not be sufficient - they could be looking for a greater level of disclosure and explanation in respect of the product and policy of this particular insurer .
The situation of Arab and German Insurance ( AGI ) is a good example . Post Boscastle a broker would have a greater obligation to his client if the insurer was selected as the risk carrier , even though the allegation that no other market was available at that time had some founding .
The purpose of an insurer is to provide funds to a claimant following an insured loss . We all recall that the concept of insurance is to put the client back in the same position that they enjoyed before the loss occurred , or to put it another way , had the incident not occurred . Therefore , we must satisfy ourselves that we have selected a reliable company who can and will properly pay claims when due . The regulator included this within ICOBS , appertaining to the claims payments being made promptly once settlement has been agreed .
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