When a broker gets into financial difficulties what is the situation with premiums already paid by insureds, but not passed on to the insurer. Waltham Pitglow sets the scene
Keeping my ear close to the ground this week I could not help picking up on conversations about intermediaries that fail, allegedly owing money to insurers where premiums have been collected from customers.
This made me think about the hypothetical question of who is responsible for what insurers might attempt to claim are unpaid premiums.
At this stage it is worth noting that the EU Directive on Insurance Mediation addresses this situation by suggesting that once a premium has been paid by a member of the public to the insurance distribution chain, it is deemed to have been received by the ultimate insurer.
If my interpretation is correct it is perhaps a lesson to us all that in the light of recently reported failures that the Directive is perhaps rather more well thought out than we might have imagined at first glance.
Certainly, if the FSA does insist that this situation will prevail under general insurance regulation then the professional broker might well say "about time too".
For the moment, however, I want readers to consider the complicated subject of the failure of an intermediary, to draw on the subjects of agency and market practice and to join me in a certain amount of hypotheses and analysis.
The thinking is of course that the broker is the agent of the insured (in most cases) and therefore that a premium is not paid to the insurer until received from the broker. On the face of it, therefore, where a broker has `spent' premiums received from clients and is unable to meet commitments to the insurer the insurer is `off the hook' for any balance and entitled to approach the insured for premiums owed.
However, before we pass on let us consider a particular situation in more detail.
Let us assume that Joe Public (JP) pays a premium of £100,000 to provincial broker (PB) who, within the terms of an agency agreement, pays a Big Placing Broker (BPB) an amount less commission (say £90,000).
BLB has a contract with a Lloyd's Servicing Company (LSC) to pay a further net premium within 30 days. BPB gets behind with payments to LSC and six months on goes into administration. LSC goes to PB (representing the insured) and states that the JP premium has not been received from BPB and asks for the premium again.
I want you to consider three questions:
What I suspect we find is that as PB is not a party to the contract between BPB and the insurer, the industry can expect only that the insurer monitors and manages its account with BPB in a prudent and compliant manner. After all, neither the insured nor PB can really have any hand in this.
So, here is the first interesting point to consider. If it is general market practice that BPB contracts with the insurer to settle accounts within a specified time, might it not be reasonable for both the insured and PB (his agent) to claim that any payments not settled by BPB within that time will become the responsibility of the insurer?
In other words, if BPB holds a premium (or does not settle it within the contractually stipulated time expected by the insured or PB) that it effectively becomes an agent of the insurer in holding that money? After all, it is the insurer that is granting extended credit beyond the contractual period that the market expects, not the insured and PB who would expect the insurer to collect the premium promptly.
In reality, such a point can only be decided at law, but I would be interested to know from readers what reaction they get from BPB if they ask how promptly accounts are settled with insurers.
However, I want readers to consider a further point. Let us suppose that in June PB pays the £90,000 to BPB and in December BPB goes under. In January LSC approaches PB and the insured and asks for 100% time on risk or a further £90,000 for a full year's cover.
This puzzles me. Let us assume that BPB has, over that six months, been making some payments to the insurer. If it has not, then I suspect that the directors of the insurer are in big trouble with the regulator.
If BPB has sent statements of account to the insurer allocating what is in effect JP's premium to other cases, then surely the argument about reliance by JP on reasonable controls and monitoring of agents by the insurer kicks in again. Is this not something that regulators also expect at Lloyd's and in the open market?
In the alternative, what about the situation, which often happens when an intermediary is in difficulty, where BPB has not allocated premiums to specific accounts, but has simply sent money to the insurer as cash flow allows and it is the insurer which has decided to allocated amounts received.
A cynic might suggest that in such a situation a less than reputable insurer might allocate money received on a preferential basis to one policy or producer rather than another less important insured or supplier.
It just puzzles me that PB can release a premium in say June and be told six months later, that none of this has been received by the insurer. Within the current regulatory and statutory framework, how can this happen and does it happen? Do let IT have your views and personal experiences.
The key learning point today is of course that the failure of anyone in the distribution chain can cause grief all the way from insurer to insured, but perhaps more than that, that the FSA's yet to be announced ideas on financial matters and security of payments by the insured could be well founded and that intermediaries should think them through with the respect they deserve.
Whether PB is responsible at law is one matter, but more to the point, is a professional broker really going to expect an important client to pick up the tab when something like this happens? Perhaps it is generally better that we accept that in the absence of the good protection of a wide net asset margin that it might just be better for premiums to pass from insured to insurer as swiftly and as safely as possible.
Perhaps insurers could publicly clarify their own practice if such a situation were to occur and also their views on their responsibility to ensure that placing agents meet contractual terms of business.
Would this not make an ideal CPD article? Let us have your views.
Using this CPD page
For the vast majority of practitioners and indeed support and supervisory staff in our industry, CPD is about regular learning and study that is planned, recorded, timed and evaluated.
If you are a member of a professional body with a CPD requirement then there will be certain rules regarding the quality and nature of study material, and the way in which it is recorded.
For staff of GISC members this means recording on your individual training file what the learning was, who provided it and when.
It might be structured, such as a course, a learning programme or exam study. But it can be unstructured. This form of study encompasses reading the trade press, technical material or taking part in activities to support your professional body.
Some CPD requirements are points related (a little antiquated) and others require a time value to be allocated.
For example, it might take one hour to read Insurance Times each week. Most of that could be put as a time value but, in reality, perhaps only an half hour was devoted to learning something. The rule is to be honest with yourself and record the time that is relevant.
Always take time to make a note of what you felt you gained from the activity. This is useful information for anyone else considering the same activity.
In response to the popularity of our CPD programme each week's CPD page can now be downloaded from our website. We will be preparing a binder for you to keep these in alongside the results of the exercises.
To download a PDF of this article as it appears in the magazine click here
You will need Adobe Acrobat