Insurers’ two-tier pricing bad for business, brokers warn

Leading brokers have called on insurers to bring renewal prices in line with those offered to new business, or face a continuation of the soft market.

Broker Network group chief executive Grant Ellis has called on insurers to address the situation “as a matter of urgency” after concerns raised by brokers that insurers are increasing rates for commercial clients by 10% to 15% at renewal but writing the same risks at new business rates between 5% to 10% lower.

In a letter to insurer chief executives, Ellis says that brokers have no alternative but to re-broke risks to keep their clients.

“For some time I have been concerned that there were grumblings in the market alluding to ‘two tier pricing’ from a number of major insurers – a gap between the price they were prepared to offer an existing client at renewal and the considerably lower price a new customer could obtain for the same risk,” he said.

Ellis, who has recently completed a tour of the UK visiting Broker Network members, said their messages were consistent. He said that despite SME commercial clients wanting to reduce their insurance overheads in the current financial crisis, insurers were “intransigent when it comes to appeals by the broker to negotiate irrespective of the circumstances”.

He added that dual pricing resulted in a 15% to 20% difference between the renewal terms and those available to new business, and pointed to cases in involving the same insurer at renewal and new business.

Biba chief executive Eric Galbraith agreed that dual pricing was a “real challenge for our sector”. “Insurers have got to assess this situation,” he said. “It makes us look unprofessional.”

Analysis of commercial rates by software firm Acturis, published exclusively in Insurance Times this week, backed up the claims. In property, for example, average premiums have fallen 9% in Q1 2009 compared to 2008, with new business premiums falling severely but renewal premiums increasing.

Ellis added that insurers’ methods would only benefit their smaller rivals and MGAs.

“We all know the market needs to harden, but that won’t happen until the discrepancies outlined above disappear for good. We need you to address this situation as a matter of some urgency if we are to be effective in this drive.”

Malcolm Smith, commercial lines director at Groupama said that new business rates need to be addressed but it would not be simple as insurers do not use standard rates for commercial business.

“Until new business pricing becomes more technically based than more competitively based then the market will not harden.

“It is frustrating because effectively the market is undermining itself by competing to levels of new business.”

See the letter in full, right.