With Lloyd's handing over regulation of brokers to the General Insurance Standards Council, the late payment issue has re-emerged with a vengeance. Yvette Essen reports on how large and small brokers are reacting....
An exasperated Reg Brown, former president of the Chartered Insurance Institute, recently asked: “In this technological age, money moves around the world in nanoseconds. How can anyone suggest that 60 days is too short a period for premiums to be paid to insurers?”
Indeed, it seems incredible that the London Market, one of the biggest financial institutions in the world, still has payment procedures that resemble a local shopkeeper's accounting methods.
The time brokers take to pay insurers the premium has been a thorny issue for years. But the latest initiative to resolve the problem seems to have stirred up more than the usual bad feeling. Some commentators say that small brokers with less than £3m turnover, will now go bust.
For decades, Lloyd's has suggested credit terms for different classes of business. This eventually led to a grid of recommended payment dates, where normal terms of trade for a UK risk was 90 days from inception. Overseas cases could in theory be longer.
But it was up to the brokers and underwriters to agree terms in each instance and, although payment was also policed through the Late Settlement Review Committee, there was no structured system.
The problem is that the big brokers have too much muscle and are calling the tune. What can the insurers do when Aon or Marsh flout the rules? Only last year, the latter refused to pay a £100,000 fine imposed by the committee, precisely for late payment.
Brokers have been enjoying the investment returns that this extra cash brings for too long – particularly in the past few years, while the market has been soft. But with the development of internet technology, excuses for slow payment are fast becoming thin on the ground.
Now that Lloyd's is handing over regulation of brokers to the General Insurance Standards Council, the late payment issue has re-emerged with a vengeance.
Two factors are at play. First, Lloyd's has published a code of practice on credit risk, giving guidance on how managing agents should oversee policy payments. Secondly, the London Market has published its principles (LMP2001), which aims to ensure speedy payments and help modernise the insurance industry. After all, it is absurd for the London Market to claim to be the heart of the world's international insurance centre while tolerating slack and shambolic payment deadlines.
In January, XL Brockbank, Ace Global and Markel International moved to introduce stricter trading arrangements and cut the payment period to 60 days. Others have followed suit.
Small brokers shifted uncomfortably in their seats. One broker, Charles Manchester, told Insurance Times that the move could severely reduce the amount of business being placed by smaller brokers into the London Market. The problem is that rates are hardening. Capacity will become scarce and insurers able to dictate terms.
David Gittings, Lloyd's regulation director, said: “There are a number of brokerage firms who rely on interest payments on premiums.” He added that some will struggle if Lloyd's takes a tough stance on payment regulations.
Tensions are high. The Lloyd's Market Association deliberately snubbed the Lloyd's Insurance Brokers Committee (LIBC). It issued immediate recommendations on payment deadlines to its insurer members in February, despite the LIBC asking them for an urgent meeting to discuss the issue first. At the end of the day, Aon and Marsh can call the shots but small brokers face a squeeze.
“Insurers should be paid more promptly, but it is a well known fact that the bigger the broker, the worse they are at paying the premiums properly,” said Charles Manchester, managing director of Dickson Manchester.
“When a Lloyd's syndicate gets 50% of its income from the top players, they are going to be more aggressive with the smaller ones. The big brokers are so big they can dictate almost any terms they want.”
Other brokers point out that it is unfair to compare markets in other countries with Lloyd's.
“We often hear about the swifter payments within other markets in different countries, but it is forgotten that the vast majority of Lloyd's business is derived from overseas, particularly the USA,” said Neil Golder, compliance director of John Bannerman.
“It is absurd to compare a transaction process involving three parties – the client, broker and underwriter of a domestic insurer, doing domestic business, with the more familiar Lloyd's route for ‘direct' or reinsurance business, involving perhaps five or six parties operating in different countries with different regulatory regimes and business processes.”
Larger brokers may flex their muscles and promise to scale down the period in which they make premium payments. The small brokers will have to comply. There is more at stake than a month's worth of interest.