FSA: premiums need guarantee

Insurers should guarantee premiums when brokers go bust. That will be the most contentious issue proposed in the forthcoming FSA consultation on prudential requirements for brokers.

Insurers are unlikely to support the proposal - particularly after being hit by six-figure losses from the recent Ward Evans collapse.

The FSA is due to release its third consultation paper on the statutory regulation of intermediaries later this month.

The paper, originally expected in January, will cover the prudential requirements to be placed on intermediaries when the FSA begins regulating them in 2004.

Insurance Times understands it will propose insurers guarantee cover will be maintained if the premium has been paid to the broker before it went out of business, despite the insurer not having received a penny.

The other model that will be proposed is that brokers should maintain 5% solvency margin on premiums in excess of £10,000.

Broker Network managing director Grant Ellis said: "Such a solvency margin could see a lot of brokers go bust."

It is understood that segregated client accounts with fixed solvency margins would hit the London Market especially hard. London Market brokers have accounts all over the world and in some cases the currency that the premium is collected in is not even convertible. One London Market broker said: "This would be an administrative nightmare."

When liquidators sold Ward Evans in December, there was a significant deficit in its client account.

Zurich and Groupama were understood to have lost £750,000 each, Allianz Cornhill £30,000, and St Paul and Norwich Union significant, but unknown sums.

The insurers came to a goodwill arrangement with Ward Evans' buyer Giles Insurance Brokers to continue to cover policyholders. But they were not obliged to do so.

Insiders said insurers were unlikely to formally accept the credit risk proposed by the FSA under statutory regulations.

However, Biba chief executive Mike Williams said that the FSA could argue that insurers already complied with the regulation in practice.

"There is an argument that custom and practice in this country has meant that this has been the case in the past because, for example, some insurers have acknowledged that brokers are their agents for the purpose of collecting premiums," he said.

"Also, where brokers have failed, insurers have very often agreed to continue cover without another premium being collected where the original premium had been paid to the broker."

Towry Law managing director of general insurance Martin Wright said: "A levy that pays into a compensation pool for those left out of pocket is an idea worth discussing."

An FSA spokesman said the authority had not yet set a date for the release of the third paper but would not be this week.