There is a school of thought that to use a disclaimer in relation to the use of a non-standard insurer would not be water tight. Both the courts and also the regulator would take a dim view of a broker attempting to sidestep their obligations in this respect.
Therefore we could sum this up by stating:
• We can use a non-standard Insurer but unless the client fully understands all the ramifications we do so at our peril.
• We could be liable if we use an Insurer who is not licensed in their own jurisdiction.
• We could be liable if we use an Insurer who is not authorised by and complies with UK statutory requirements
• We are more than likely to be found liable if we use an Insurer with no or a poor insurer rating
How
All brokers should therefore consider establishing the financial security of their suppliers. There are a number of rating agencies available including Standard & Poor and Fitch and Moody’ s to provide analysis of the market. Unfortunately these are sometimes more confusing, so companies like Litmus Analysis can make sense of the ratings and give [ in broker speak ] a clearer picture. All of these companies have a market reputation and as such would be an acceptable partner.
However, all rating companies are commercial and it is for that reason that brokers need to negotiate with their preferred agency a security rating product which gives access to appropriate insurance providers and Lloyd’ s of London insurance markets.
Due to the size of many brokers’ portfolios it would also be wise to have a review, on a regular basis, of their chosen markets. This could be achieved by having a standing report at each of the Directors and / or Senior Management meetings.
Another option would be to formulate a small team and include staff from finance, technical, operational or relationship sections and to sit every quarter to review the existing markets. It would also be wise for them to review any potential new markets that may be able to replace or enhance existing panel members. On the few occasions when this committee is faced with an issue such as whether or not to support a BBB + insurer with a positive outlook over an A- insurer with a negative outlook, they could ask for advice from their appointed business advisors, but this would come at a cost. It would also be beneficial to review, on an annual basis, all markets used during the previous 12 months.
One big question is where do insurance brokers draw the line between an acceptable market and a market with a poor rating? Again this is a difficult question to answer as there are many factors which could influence the judgment, such as the length of the company existence, their portfolio and their financial track record.
In a speech made on 5th June 2005 by Dr Thomas Huertas, Director of the Wholesale Division of the FSA, he outlined the position of capital markets having access to funds after distress. Therefore, we can draw from his views that from an insurer’ s perspective the question of referencing following a major drain on their reserves will be dependent upon their security rating. As Dr Huertas points out, and drawing from Standard & Poor themselves, an insurer with a BB + rating was within a territory as likely to experience a stress point, whereas one notch above at BBB- this would be viewed as speculative.
In today’ s economic position we just need to look at the cost of borrowing for the UK which, following its downgrading to a Standard & Poors rating of AAA – [ negative watch ], is approximately 1.8 % against Greece with a rating of B- [ stable ] where their cost is 9.7 %( S & P and Bloomberg May 2013) on 10 year gilts, or government bonds, which equates to a 500 % difference.
This shows that although there are companies who will loan money the cost could be prohibitive which might be a barrier in itself.
It is therefore recommended that brokers should set the bar at a point which they are comfortable with after taking guidance from Dr Huertas. This would allow each broker to review any market with whom they trade especially where that insurance company drops below BBB. If and when this does occur the broker will be in a position to engage with the company to question the reasons behind the drop and then to consider the appropriate action. One such act is to consider if they need to instigate a block transfer or a programmed withdrawal, in the same way that occurred with Independent all those years ago.
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