The news (1 July, Insurance Times) that three major insurers will be offering brokers credit risk transfer will be greeted with jubilation by many in the market. But the revelations should be met with a degree of caution.
It is unlikely that insurers will offer all brokers risk transfer. Instead, they will decide on commercial grounds, offering risk transfer to brokers with whom they want to build or maintain relationships in preference to those that are weaker or more marginal.
It must also not be forgotten that the FSA's rules on client money remain. Brokers must still be able to distinguish non-risk transfer money from risk transfer money.
Smaller brokers are likely to be the greatest beneficiary of insurers' moves to offer risk transfer. The impact of the FSA's solvency and capital requirement rules on the broker will be reduced. And as smaller brokers are likely to have fewer agencies, the problems of trying to balance a number of risk transfer/non-risk transfer accounts will be less.
In contrast, wholesale brokers could feel the greatest sting from the acceptance of risk transfer. Insurers may choose to collect the premiums direct from the first broker in the chain - the client-facing broker - leaving the other brokers at a disadvantage.
Brokers further up the chain would be required to ask the insurer for commissions rather than simply deducting them as the premium passes through their accounts. The balance of power would shift, with insurers gaining the upper hand.
While insurers' acceptance of risk transfer is, on the surface, a positive move for brokers, the ramification should not be forgotten.
