IBSC to issue guidance on unrated insurers

The Insurance Brokers Standards Council (IBSC) is set to issue guidance to brokers on the use of unrated insurers.

IBSC chairman and Seventeen Group managing director Paul Anscombe told Insurance Times that the new professionalism council was seeking legal advice on insurer security.

“The IBSC will be focusing on giving guidance to brokers around the complex issues of insurer security,” Anscombe said. “We are specifically taking advice from our legal, financial and regulatory advisers and, as practising brokers ourselves, we will ensure that our guidelines are realistic and practical. Ultimately it is about how best we can serve, inform and protect our clients.

“We are accepting members to IBSC from March and are planning to have guidelines relating to insurer security out by the end of April. We greatly welcome the view of practising brokers to help shape these guidelines.”

And Anscombe said the complexity of the issues, combined with several high-profile insurer failures within the solicitors’ professional indemnity (PI) market, led the council to look into the issue.

“The solicitors market has been a microcosm of the issues around insurer security,” he said. “We are talking here of a sophisticated buying market in an intensely competitive arena. Some sectors of the market, particularly small firms, have struggled to find cover and so low-rated or unrated capacity such as Quinn and Berliner has surfaced over the years. Some law firms took the view that we either accept poor quality insurer security or cease to practise.

“While understandable in one sense, it should be of huge concern to both the legal profession and the insurance market that in reality the clients of some firms are unprotected. Access to quality professional indemnity cover by solicitors is absolutely crucial to the business world and so ultimately solicitor PI premiums must rise to reflect the risk. This obviously has major implications for the legal world, but cannot be ignored. I am therefore pleased that the SRA are reviewing the use of unrated insurers, but am very aware that none of the options available are palatable.”

One area of concern for Anscombe was the use of unrated insurers by brokers simply on the issue of price.

“There are, unfortunately, too many occasions where low-rated and unrated insurers are used merely for price advantage and this must be a concern,” he said. “Even allowing for different insurer expense ratios, if an unrated insurer is substantially below the market price for a sector then the broker should have concerns about the sustainability of cover and price, or indeed to survival of that capacity. Are we treating customers fairly and making them fully aware of the risks involved when transferring the clients’ financial risks onto an unrated balance sheet?”

Anscombe said that while the approach for different brokers would vary, it was of fundamental importance that the broker adequately assessed the security of the insurers they placed business with.

“Clearly, much depends upon the size of broker and complexity of the risk placed,” Anscombe said. “A global broker placing multnational programmes for huge corporate concerns in high risk sectors will have significant resource dedicated to insurer security and clients should expect no less. This is very different to a small regional independent broker placing a local commercial combined policy for a local client.

“The professional independent broker will have an approved panel of insurers they choose to trade with and this will often be linked to the rating of an approved rating agency, supplemented by what they read in the press or pick up in the market. Ultimately in both scenarios the client expects to be paid, but common sense dictates that the broker conduct on insurer selection is appropriate.”