Ashwin Mistry looks at why we should wean brokers away from the quick fix of unrated insurers
By Ashwin Mistry, executive chairman of the Brokerbility network
Like many animals, human beings are pretty good at identifying and avoiding short-term dangers but rather weak when it comes to thinking about the more distant future. Long-term planning often involves difficult decisions or short-term discomfort.
So, we go for the quick fix. There are plenty of examples, but perhaps the big one, our approach to the threat of global warming, sums it all up.
I tend to see the use of unrated carriers as another quick fix. The story usually goes something like this: Mainstream insurers pull out of a high-risk class on the basis of damning underwriting data.
New capacity flows in, often through unrated providers, and brokers heave a sigh of relief that they can continue to offer that class of business to their clients.
Alternatively, unrated insurers undercut the market because they have a lower cost basis and lower capitalisation requirements, and brokers have the opportunity to respond to their clients’ persistent pursuit of cheaper cover and at the same time earn more themselves through higher commissions.
Of course, one of the consequences of this short-termism is the continued and regular collapse of unrated insurers, with Alpha and Lamp going under in recent months.
And each time it happens industry bodies and regulators make noises about policyholders getting hurt and the damage to the industry. But then nothing happens, and brokers continue to place business with the new unrated insurers that arrive on the scene.
So, what should we do? What are the solutions?
Firstly, I believe, we have to examine the disproportionate use of the Financial Services Compensation Scheme. The levy will be higher again this year we are told, but surely it is inequitable for all brokers to pay the same contribution when some are prepared to take dangerous risks with their carriers.
I believe that those who use unrated insurers should automatically pay a higher proportion-based levy.
Secondly it should be a requirement that clients are not only informed that their insurance comes from an unrated provider, but that they should acknowledge in writing that they fully understand the consequences, in particular the fact that PI probably won’t protect them from an insurer going bust.
Indeed, if they are not told, it must surely increase the likelihood of brokers being sued by their clients for professional negligence.
The third item on my wish list is for tighter controls over capital funds flowing into the country, though I accept that this unlikely to happen in the immediate post-Brexit environment.
Lessons to be learned
However, at the very least the regulator should be looking into the financial profile in terms of capitalisation of unrated insurers.
There are other lessons to be learned too from the recent insolvencies. After the collapse last summer of Danish insurer Alpha, many brokers have now turned for alternative capacity for the black cab market to Gefion, another unrated Danish insurer.
At the time of writing Gefion was already under intense scrutiny, with providers including Premium Credit pulling out of financing agreements. Yet brokers justify their use of unrated providers by the retreat of mainstream insurers from the black cab, and other key markets such as construction PI and a broad sweep of new and emerging risks.
I contend that it is now time for insurers to re-enter these markets. Pooled arrangements by, say, the top ten or twenty insurers would allow them to offer capacity for more difficult risks by spreading the exposure.
Before this happens, of course, there needs to be extensive conversations with brokers about what sort of risks are under duress and the markets in which they are being driven to obscure providers.
Clearly the construction PI market post Grenfell Tower is one such example, where in many areas – consequential loss and product recall, for example – mainstream insurers have simply walked away leaving brokers to pick up the pieces for their construction clients, frequently in mid contract.
There are other fast-moving trends within our society where insurers are failing to react quickly enough. The accelerating shift, for instance, towards shared cars and houses and even tools and equipment is being hampered by lack of imagination from underwriters and response from insurers.
Nevertheless, as a broker I’m the first to acknowledge that we are on the frontline facing and supporting our clients. We obviously need to be doing due diligence on insurers and not using unrated carriers unless we absolutely have to. We also need to be open with our clients at all times and give them the fact so that they are able to buy into the decision.
And openness by the way means saying, if it is indeed the case, ‘You want a cheaper deal, I want more commission, so I will place you offshore. Are you happy with that?’
Everyone in the industry knows what’s coming down the road. It’s about using insurers that haven’t got the necessary financial standing to get a rating from the rating agencies.
By definition, that means they are vulnerable and more likely to go bust. If we carry on with the same regime, it isn’t going to stop. And as it goes on, some policyholders are going to get badly burnt. We cannot afford to continue turning a blind eye and avoiding the short-term discomfort.
Time for some long-term thinking.
Ashwin Mistry is executive chairman of the Brokerbility network