Simon Burgess warns of the threat from offshore insurers who operate in more relaxed regulatory regimes
As brokers struggle to compete for the 100 million insurance policies sold each year in the UK, a new threat has emerged to make life more difficult for them.
Over the past decade, the biggest threat to brokers has been the emergence of direct writers. But as customers became confident withthe internet, other providers also saw an opportunity for moving into brokers' territory. The offshore insurers had arrived.
Offshore insurers are not bound by the same rules and regulations as those based in the UK. Firms do not come under the jurisdiction of the FSA and consumers do not have the safety net of the impartial mediation of the Financial Ombudsman Service (FOS) if they have a dispute. Neither can customers gain recompense from the Financial Services Compensation Scheme (FSCS) if their overseas provider goes bust.
If an offshore provider writing non-compulsory lines of business finalises the insurance contract in its 'host' country, then the firm is not subject to FSA regulation. The country of domicile may well have rules and schemes in place that are equivalent to the FSA, FOS and FSCS, but these apply only to companies transacting business in that same country. Those who do not will find it easy to slip through the regulation net.
I can understand their popularity. One quick internet search led me to a site that offered to set me up as an offshore provider in the British Virgin Islands for £650. On payment of this fee, I would be provided with all the necessary set-up documentation, plus the first year's registered office fee, government fees and taxes. It's a tempting thought.
But consider the small businesses who might sign up to my policies. The flood-stricken businesses that suffered in the Boscastle floods are a case in point. They took out policies with a Jordanian-based insurance company and have allegedly been left 'high and dry' with no pay-outs. Who wants to get involved with the intricacies of the Jordanian judiciary system?
The UK insurance industry has a greater duty of care to educate consumers about the risks they're taking if purchasing cover from an offshore provider. We all appreciate that consumers are at liberty to shop around for the best deal. However, price and a quick sale are often the top priorities, and any secondary thoughts about customer service and claims are considered only fleetingly and dismissed.
And before brokers complain that consumers aren't as shallow as that and they're more savvy about their insurance needs, look at our industry's marketing messages. We pump consumers full of one liners about being "one click away"... "easy to deal with"... "the cheapest quote in the market".
It's not just the internet that allows the offshore market to prosper. Our own industry, coupled with government taxes and regulatory red tape, are prime contenders. Consumers may unwittingly end up with offshore policies, or be forced to look further afield as UK underwriters cease to cover their risks.
Brokers have many insurers to choose from. Look at the schemes advertised in the back of trade magazines, buyers guides and other directories.
These may well be robust, highly-rated firms, but how much information do brokers have on their providers?
Certainly there's a duty of care to check the insurers' solvency, as professional indemnity cover excludes this. What questions should be asked? How many brokers fully consider the reinsurance aspects; who are the reinsurers and how much of the risk is retained? What about retention levels, capitalisation, UK claims costs, and underwriters?
There are inadequate mechanisms in place for brokers to properly help consumers make informed decisions. As a result, brokers are, often unwittingly - due to lack of robust company data - recommending them to clients. Trade bodies all provide guidance on due diligence. Biba offers members access to an AM Best rating scheme, but this only rates firms that have been trading for five years or more.
There have been moves to try to address this issue, but it appears our industry has little appetite to support it. When the director general of the Institute of Insurance Brokers, Andrew Paddick, tried to launch a wholesale insurer directory, he couldn't get adequate co-operation from the sector and had to shelve the project. Do insurers believe that if it's not mandatory, there's no need to provide the data?
It's not surprising when FSA disclosure rules only require the policy cost, main exclusions, the name of the insurer, how to complain and the availability or otherwise of a compensation scheme (which may not necessarily cover the provider).
Brokers do not have to detail where the insurer is domiciled or point out the ramifications of purchasing via an offshore provider, if indeed they are aware of the location. It should be mandatory for brokers to disclose the insurance provider and country of domicile when presenting documentation.
In its report The impact of general insurance regulation one year on from introduction, the ABI concludes that few customers are interested in 'status disclosure' information, such as who regulates the company selling the policy or whether its products come from one or more insurers.
But customers should be interested. The 'buyer beware' principle applies as much to insurance as any other product. It should also be 'broker beware'. If brokers cannot evidence their checking procedures there's possible exposure to PI claims.
Brokers often have no choice but to offer an offshore product - no one else may be willing to underwrite the business. We're already hearing that properties on flood plains will be unable to secure household cover, so what's to stop intermediaries or homeowners directly looking further afield to secure cover?
But is it ethical for the UK insurance industry to turn its back on higher flood risks and force the hand of brokers and consumers?
It's not only offshore insurers that consumers should be wary of. At the beginning of June it was reported that John Walker, from Edinburgh-based Tribune Risk Services faces prison after admitting selling £10m of policies without any underwriters to back them.
FSA regulation, will thankfully, result in less of these situations occurring. At least consumers have the FSCS to fall back on. Whether offshore insurers or brokers, more FSA action is needed to stop illegal trading.
There needs to be greater consumer education about why it's best to buy British via FSA regulated firms and more information must be shared with brokers and consumers detailing the implications of sourcing cover via an offshore provider. Our industry also needs to look at where it's refusing to underwrite risks and source a cross-industry solution.
It's time to follow in the footsteps of the tobacco industry and issue a generic warning about offshore policies - they could damage your wealth. IT
' Simon Burgess is managing director of britishinsurance.com