As I intimated in my last article of 2000, the reinsurance renewal season was indeed a challenging one for insurers, as the principal reinsurance markets demonstrated their resolve to carry substantial rate increases and to impose increased retentions on most programmes.
Negotiations were often protracted, but in the light of recent trends pushing up claims costs, and with a number of factors on the horizon that look likely to ensure that such trends will continue, the rate increases were no more than a reflection of reinsurers' reasoned approach to pricing.
The primary markets would be wise to heed their example and underwrite realistically, as it would be short-sighted to try to continue to absorb all the rate increases imposed by our reinsurers and not reflect them in our own premiums.
The practice of providing long-term policies should also be re-examined. Ideally, primary insurers should achieve this discipline themselves, without waiting for their reinsurers to coerce them into prudent and necessary rating action.
The issue of insurers' terms of trade has attracted a certain amount of fairly heated debate recently, and clearly the need to achieve greater discipline in the collection of premiums will be a particularly important challenge for the market as a whole during 2001.
However, the current atmosphere of blame and counter-accusation involving underwriters and brokers is probably only serving to cloud the issue, and a more sensible approach would be beneficial if we are to achieve a workable solution and thus enable the market to retain its competitive edge.
A number of brokers have pointed out the difficulties they typically encounter when trying to process premiums in a timely fashion, particularly on international and treaty business. It is important to identify late payment problems and deal with brokers individually, so that any specific concerns they may have about moving to shorter settlement periods can be identified and addressed.
We do not wish to be unnecessarily inflexible, particularly where there are genuine problems to be resolved. But a sense that all parties are committed to the open-minded examination of how to improve the efficiency of their overall back-office functions, encompassing the whole process from issue of cover notes, is desirable.
Such improvements indubitably will not happen overnight. However, progress will be maximised if companies demonstrate the will, at board level, to re-examine how they can collect premiums from their clients and pass them on to insurers more efficiently.
It is in everyone's interests to move to an accepted market standard so that we can all focus on developing our businesses, improving customer service, and other similarly productive activities, instead of incurring expenditure on recovering monies owed to us. After all, by ensuring that premiums are collected quickly, everyone benefits from the reduced credit risk.
Credit control is, furthermore, just one aspect of a much wider problem, that of overall standards of customer service and administrative efficiency. As the recently-published Biba annual research survey demonstrates, only 9% of commercial lines brokers approached were “extremely satisfied” with the service they received from insurers in 2000, down from 14% in 1999.
The implementation of the London Market Principles 2001 demonstrates that the market acknowledges the need to streamline and standardise its processes in order to ensure that it remains an attractive forum in which to transact insurance business. The relaxed standards which have permitted settlement of premiums more than 90 days, and in some cases 120 days after inception of the policy, have long been acceptable in London.
However, insurers in other countries such as Australia, and in certain US states, accept and adhere to a universal standard for the settlement of premiums, and the penalties associated with the failure to meet such a standard. Could this not also be achieved in London?
When looking at ways of improving premium collection methods, there are a number of options available to both brokers and insurers. For example, in the retail industry interest is charged on a debt if payment is made after the credit period.
Late payments are pursued as bad debts, and interest plus the cost of recovery are charged to the debtor. If this arrangement is acceptable in other UK industrial sectors, the insurance industry could surely at least consider following suit. The technology available to us all today should also assist us to find ways of transferring funds more efficiently.
I believe that the terms of trade controversy is one which would benefit from the formation of a market working party charged with finding a practical, truly workable solution within a reasonable time-scale.
We must find a sensible solution quickly, so that we can all focus on improving and maintaining standards of customer service and thereby grow our business. Insurance provides a valuable service to the economy as a whole by enabling companies to manage the risks to which they are exposed. Insurers and brokers must work together to find a way of ensuring that they can continue to perform this crucial role, while at the same time, receiving timely and adequate remuneration for the services they provide.
