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 Moreover they could be out of date and not take into consideration the dynamics of their portfolio.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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