When it takes nationalisation to rescue robust operators such as AIG, it is no wonder consumers are confused. Brokers can help, but only if they have accurate data. Ellen Bennett finds out how they can get it.
Are you placing new business with AIG? Should you be? Yes, according to Lex Baugh, the insurer’s UK chief executive. He says it is the job of brokers to provide facts and stop panic among clients. But with the nationalisation of AIG – and that of banks across the world – the unthinkable has happened to the global economy.
Brokers will be the first port of call for worried clients. It is, after all, their job to reassure clients and offer them informed and impartial advice. But where can they get that? Who do they trust? And what does the credit crunch mean for them? Insurance Times has compiled the ultimate survival guide for today’s broker.
Brokers are legally obliged to monitor an insurer’s solvency and to advise their clients – and not just at renewal time. The legal precedent comes from Omson vs Moss in 1970. The case centred on an underwriter of motor policies that was known to be in financial trouble when the broker placed a risk with it. When the underwriter went bust and the claim was not paid, the broker was found liable for the loss. So it was established in law that the broker has an ongoing duty of care to its clients.
Baugh says: “It’s the broker’s responsibility to make sure it imparts very factual information; of late, there have been more eyes on AIG and AIG’s insurance operation than probably at any other point in time. So there’s a lot of factual information out there, from regulators, the ratings agencies and the brokerage community. It’s a matter of making sure clients understand the factual position around AIG – it is still a strongly rated insurance company.”
Baugh acknowledges brokers have to move the business if that’s what their clients, armed with the facts, want. “Of course, it’s the job of the broker to ensure that if a client wants to look at alternatives, they have them available. That is and will continue to be their job.”
Brokers don’t need to be reminded; the phone has barely stopped ringing for most. When AIG was on the brink, David Morrison of JJ Ballantine was receiving dozens of calls a day. “We do not have a huge AIG account, only around 250,000,” he says, “but it was surprising how many people picked up on the news and wanted to know more.
“We were only too grateful that we’d had the information about the backing coming from the Federal Reserve. It does highlight the fact that people are concerned, and they do have memories of past incidents of insurers going [bust]. I think this highlights the whole question of transparency and the exposure banks and insurers have to the subprime market.”
So what’s the answer? There are countless sources of information available but brokers should be selective – they must not be swayed by misinformation or rumours.
Ian Clark, an insurance partner at Deloitte, says: “It’s very important for brokers to proactively monitor this, particularly with commercial clients. If they don’t, they are not doing their jobs properly.”
So where do they turn? First up, says Clark, is Companies House (www.companieshouse.co.uk), which provides financial statements and regulatory returns on all UK-registered companies.
Insurers’ websites will also often include financial statements and links to analyst reports and relevant press announcements. Clark advises looking out for inter-group reinsurance – an insurer can be dragged down by a failing parent company. Brokers should also be aware of insurers’ exposure to reinsurance and who their reinsurer is. Some insurers place as much as two-thirds of their business with a reinsurer, meaning they would have serious problems if the reinsurer were to hit hard times. Also, says Clark, be aware of whether there are any third-party guarantees on an insurer’s book.
Biba is also on hand to help. When the extent of AIG’s financial problems first became known, in the days before it was nationalised by the US government, Biba made information available to its brokers and publicised a helpline number for a contact within the insurer.
Graeme Trudgill, Biba’s technical and corporate affairs executive, says: “If the worst happens, we have put together a guide to what a broker should do. It details how the Financial Services Compensation Scheme (FSCS) works and how consumers can claim. We have learnt from what happened with Independent [which went bust in 2001].”
He reckons brokers must be aware of what books of business they have placed with troubled insurers, and monitor them closely. “We say, ‘look at your book and be prepared’,” he says. “Biba can’t tell brokers what they should be doing. We make all the information available to them and then they can decide.”
Although there are now questions about the usefulness of ratings agencies – none spotted the imminent demise of AIG – Trudgill and Clark both say they still have value. Biba has a deal with Standard & Poor’s to offer brokers its services at a discounted rate of about £300 a year.
“There are a number that have not signed up to ratings agencies and we think that’s a little bit risky,” says Trudgill. Once a broker has compiled the information needed, it must be monitored. Large brokers such as Venture Preference hold weekly meetings to assess insurers’ stability and decide a policy on placing business that is then followed throughout the broker.
Brokers also need to consider the impact of the credit crunch on their own businesses. As George Berrie, director of trading at Norwich Union, points out: “Brokers should ask themselves how stable their customer base is in the face of competition from a broker with a superior business model,” he says. “A model that does more for the client than trying to get a cheaper price at renewal time – a model that has regular dialogue throughout the year, so the client derives real value rather than just cheap premiums.”
So the argument comes full circle, because that value comes from the advice the broker offers to clients. Despite the hazard signs, the gloomy headlines and the bleak warnings from insurers, the smart broker can not just survive, but thrive in the credit crunch.