Be careful out there

That’s the thing about fireworks – it’s only when they explode do you see and feel their full effects.

As the subprime mortgage crisis in the US deepens there will be senior executives at a number of financial institutions who feel as if an enormous air bomb has gone off in their balance sheet, leaving a smoking hole in profits. Indeed, some senior executives have already had the blue touch paper lit underneath them and have followed a swift trajectory through the exit as a result of their firm’s exposure to the financial turmoil.

The Federal Reserve recently injected $41 billion into the US market to calm investors’ jitters and aid stability; the Bank of England has also taken similar action here. The figures are staggering, but what I find even more surprising is how little information the financial institutions actually have about the risks that they took on. Still no one knows the true extent of these losses or where they will fall - the insurance market will not be immune, particularly if D&O or PI cover has to respond.

This uncertainty coupled with soft insurance rates and a slowing economy means that intermediaries will face increasingly difficult decisions about where to place business and what to advise their customers in the coming months. Added to the economic situation we have wage inflation, a skills shortage and the potential for increased fraud.

Brokers are at the front line in this highly competitive environment where insurers, underwriting agents, MGA’s, wholesalers and insurers who are passported into the UK are all jostling for ascendancy. BIBA has even come across insurers quoting against themselves in a frenzy of price without value.

For brokers stretched by getting new business on board and defending existing business a very cheap quote may seem an answer to their prayers as well as their clients'. Invariably, it is not. Brokers will need to be vigilant about the entity they choose to place business with.

Clients faced with increasing business costs and a reducing turnover will look to make savings where they can. Unfortunately, the decision about whether to purchase insurance can fall by the wayside when harsh economic reality bites at a business.

For brokers, this means having to contend with the even greater challenge of trying to persuade a client to look at the added value of greater security when all the insured can see is a slowing economy and mounting costs.

As recent events have proven, it is a dangerous world out there.