Insurance Broker’s due diligence on insurers. 

YOUR COMPLIANCE MATTERS:   Insurance Broker’s due diligence on insurers. 

Relevance:                   All firms.

Action required:         Review markets used, ensure final insurer known when MGAs are used. Communicate clearly with clients regarding insurer security

Given hardening market conditions, in a number of sectors, there may be a temptation to use new insurers, and wholesale facilities, which may lead to using insurers with a poor (or no) financial rating, in order to obtain acceptable terms for your client.

The FCA has previously published guidance on its expectations, regarding Broker’s due diligence when selecting insurers. The guidance is brief, and we have provided it in full below:

‘We (the FCA) expect insurance brokers to demonstrate that they have carefully considered the insurers that they place their customers’ business with.

Suitable due diligence is a key part of the process that we expect insurance brokers to perform on the insurance companies they use.  

Our main concern is the risk to customers in the event the insurer fails and are unable to pay claims.

The failures of Alpha, Enterprise and Gable demonstrated the harm that can be caused to customers as over 1 million policyholders had to find alternative insurance cover.

Insurance brokers have a vital role to play. The customer sees brokers as trusted professional advisers and experts on insurance matters. We expect brokers to be able to demonstrate that suitable due diligence has been performed on the insurers that they place their customers’ business with.

Here are some examples of what brokers should consider as part of their insurer due diligence:

·      Insurers' Solvency and Financial Condition Report: A key figure and indicator is the solvency coverage percentage.

·      FCA and Financial Ombudsman Service (FOS) complaints data: This will give an indication on how insurers treat their customers.

·      Audited accounts of insurers. UK company accounts are filed at Companies House, but there may not be an equivalent for overseas firms. If the accounts are not available, ask yourself whether you are comfortable doing business with them.

·      BIBA’s Litmus test: This provides some financial analysis of unrated insurers and a comparison of financial ratios against the wider insurance market.

·      FCA Register: Check if the insurer has passported in on a branch or a services basis. UK firms, and firms passporting in on a branch basis are automatically covered by FOS. Firms passporting on a services basis can elect to come under the Voluntary Jurisdiction of the FOS. Check if your firm is covered by FOS. If not, check if there is a dispute resolution scheme in the home state, and whether UK customers are eligible.

We expect brokers to clearly detail the name and address of the insurer in the literature provided to customers. We have seen examples where some brokers think the Managing General Agent (MGA) is the insurer and are not aware of the insurer behind the MGA. It is important that customers can make an informed decision on where their insurance is being placed.

As brokers, you should be comfortable that you are placing your customers’ business with an insurer where you would be happy to be a policyholder.

We are planning to do further work to verify that insurance brokers are conducting appropriate due diligence on the insurers they use.’

What if the only option is an unrated insurer?

There is no guidance from the FCA on this issue but, in our view, the lack of an acceptable credit rating must be drawn to the client’s attention before cover is placed. In circumstances where cover cannot be obtained elsewhere (or the client is not willing to accept the premium or terms from an acceptable insurer) a statement along the following lines should be provided to the client:

‘We normally arrange cover with insurers that have a published financial rating. In this case, the only terms available (or terms that you consider acceptable) are from XXXXXX. The Insurer is based in XXXXXX and does not have a published rating. We are therefore unable to comment on its financial strength and you should be aware that, should the insurer become insolvent, outstanding claims may not be paid and cover may need to be rearranged at your expense.’

Going further

We are aware that many Brokers will only place cover on this basis when the client has signed a letter along with following lines:

‘Dear Sir/Madam,

Identity of Contract:

Identity of Insurer:

We are writing to you to confirm your instruction that the above should be used as an insurer underwriting the above contract of insurance.

Whilst insurance brokers cannot guarantee, or accept responsibility for, the financial security of insurers, XXXXX (Insurance Broker) operates policies and procedures for the purpose of reviewing the financial strength of those underwriters through whom we place business on behalf of our clients, in line with commonly accepted standards of measurement.

The above insurer is one which has not met our current criteria and can only be used with your approval, and we are therefore seeking your specific instructions and consent to use the same.

We ask you to sign below and return a copy of this letter to us as your acknowledgement to proceed on this basis and confirmation that XXXXX (Insurance Brokers) shall have no liability to you for any reason whatsoever in respect of the use of the above insurer.

Acknowledged and agreed on the __________day of _________________________ 2020.

Signed by ________________________________ Name_____________________________

On behalf of _____________________________ Position____________________________

E&O Risk

Although taking the actions above may provide a defence against a client complaint, should the insurer fail, there is no guarantee that this will be the case so, please be conscious of the risks associated with using unrated insurers (and make sure you know who sits behind an MGA or Wholesale Broker).