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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