FSA will provide several ways for brokers to fulfil requirements
Broker concerns about solvency requirements have been somewhat allayed as it is now believed the FSA will give them a range of ways to fulfil prudential requirements.
Insurance Times has learned that, rather than setting a single compliance model, the FSA's consultation on prudential requirements - to be released in early March - will give brokers a number of ways in which to illustrate compliance.
One option will be for brokers to maintain a 5% solvency margin on the average client balance in hand at any one time, rather than on the total premiums they write. For most brokers, this represents around 20% of total premiums, so a broker writing £2m in premiums would be required to hold £20,000 for solvency purposes.
But brokers questioned the effectiveness of such an arbitrary percentage in the event of a broker collapse. Ward Evans's client account deficit, believed to be around £3.5m, is a case in point. With estimated gross written premiums of £60m, Ward Evans would have needed to set aside £600,000 under a 5% solvency model.
"A broker can have 5% set aside and still become insolvent, so what's the point in requiring someone to have an arbitrary solvency margin?" said one broking source.
Another alternative will be for insurers to guarantee brokers' premiums.
This may work for brokers that have strong relationships with insurers, but is unlikely to get insurers' wide support.
"We would need to consider the proposals, but it's not the job of insurers to guarantee the solvency of intermediaries," an ABI spokesman said.
But some brokers believe the FSA is missing the point. Broker Network managing director Grant Ellis said the current GISC requirement for brokers to show they could balance their client account at the end of each month better indicated solvency.
