The FSA is seeking out undisciplined underwriting, Many brokers say it will find it. Caroline Jordan reports
Reckless underwriters, driven by pressure to meet unrealistic targets set by clueless insurance company bosses, are behind the current soft market.
This may not be the case with all insurers, but a number of brokers are concerned this is an accurate picture. Now the FSA, fearing a market crash, has announced it is probing a number of underwriters to check whether their pricing models are sufficiently robust.
The FSA will not reveal which insurers are under its spotlight. But, according to most brokers, the soft market is evident across the board.
For brokers, a soft market is bad news. Commissions fall and, as broker Stuart Stead, client account handler with Business Insurance Solutions, says: "The downside is when the market hardens, we are in the firing line of the client and have to justify why premiums have increased three fold."
He comments: "We are entering silly season once again with what seems to be either a blatant disregard of underwriting risks or, at best in some cases, a genuine attempt to reduce premiums for the best risks."
Stead describes insurers' rate reducing strategies as "haphazard" and adds that national brokers are also guilty of driving down premiums. "Some use bullying tactics with insurers. If they want a cut price deal from the insurer, they will threaten to turn the tap off if they don't get it - meaning they won't give the insurer any more business."
Paul Dickson, managing director of Dickson Insurance Brokers, says: "There is pricing chaos, much of the market is out of control - underwriters want business at any price. This year, it's been 30% off everything."
Dickson believes insurers are building up market share "before the FSA implements risk management Directives". But at the same time, they are "devaluing insurance as a commodity and damaging the industry's' reputation."
Duncan Scott, director of Layton Blackham, says: "Insurers have jumped off the edge of a cliff and liability, in particular, is in freefall. One problem is if the cycle then turns quickly, it's hard for customers to budget. We want to see a much flatter cycle.
He adds: "The FSA is perfectly justified in its investigation as it is there to see there are stable financial markets."
Both Dickson and Scott support the FSA's move, but not all brokers feel the regulator is right to poke its nose into insurers' pricing, which they argue is controlled by market forces.
According to Ian Mantel, principal of Manor Insurance Brokers: "The FSA is primarily there to deal with retail issues. We still have problems with misleading advertising for example. If it starts over regulating, customers will suffer."
And, he points out: "I can't see this investigation stopping the cycle or insurers offering discounts - they have always done it. It should concentrate on promoting better training in the industry and what it is charging. As a broker, I'm paying five times as much now than with GISC. Why is it based in Canary Wharf, which is one of the most expensive parts of the UK?"
Alan Russell, marketing and development director for broker Bruce Stevenson says: "The FSA's investigation is not going to help - the cycle is pure supply and demand and we just have to manage it. The regulator should concentrate instead on sorting out those who are non-compliant."
Despite falling prices, he says many insurers know exactly what they are doing. "Most know when the market is about to turn and are skilled at maximising returns. Zurich for example, uses consultants McKinsey to help it analyse the cycle. There are some rogue elements out there, but these are a minority - and you can't change the situation where some insurers will provide favoured brokers with better deals."
Andrew Purnell, technical director with brokers Jelf Group, says the FSA will have its work cut out finding the right balance between market forces and regulation. "There was a time when a tariff existed, a rule book which gave rates and approved discounts, but this went out in the 1970s. It was forced out because new entrants said it was creating a monopoly."
He says some of the cheaper pricing is also acceptable. "In the food industry, you had huge increases which led to companies going out of business as they could not afford cover. Insurers are now taking a more rational approach if the business is managed properly."
Purnell adds insurers benefit now from vastly improved information sources and can make fast corrections where needed. "The control should remain with the insurers although I think the FSA may want to introduce some kind of audit. The problem is that most insurers have ambitious growth targets and these influence pricing. Can the regulator monitor these?"
Insurers are refusing to all be tarred with the same brush. François-Xavier Boisseau, managing director of Groupama, says: "There are too many accountants running insurers and we are also in an industry which is a victim of fashion - look at the current trend of offshoring. We will see some start to bring business back here."
He emphasises the soft market is not homogenous. "In private car, it is on the edge of unprofitability, but small price increases should reduce the threat. Household is highly competitive and I don't believe underwriters have prepared for a weather event, which is likely. SME is highly competitive too and not being priced properly to account for liability, which is dangerous, as it's usually sold as part of a combined policy."
Boisseau argues that insurer chief executives should have "regular pricing reviews" and to take a leaf out of his book, by visiting brokers with account managers to obtain a feel for how deals are done.
He adds he has some scepticism about the FSA's investigation because of enforcement problems, although concludes: "Its intention is right." IT
What the FSA is looking fo
The FSA's investigation will be lead by its insurance sector leader, David Strachan. Its aim is to "check there is a clear board policy on underwriting and that systems and controls are in place to monitor adequately that actual pricing is consistent with this policy". It will find out if insurers are:
The regulator stated it would report on its findings by the end of the year.