Brokers should trust their gut instinct when dealing with unrated insurers

A panel of leading industry experts speaking live at Insurance Times’ BrokerFest 2020 event said that brokers need to trust their gut instinct when it comes to dealing with unrated insurers, as a firm’s security rating is only one piece of the insurance puzzle.

In the closing panel discussion yesterday Roger Flaxman, executive chairman at Flaxman Partners, explained: “When we’re talking about security in these things, that the brokers’ intelligence, your gut instinct about an insurer and the way they behave and treat you, and the quality of their policy wordings, the number of errors – look at the things that are naturally in your face as a broker, and you’ll probably find your gut instincts will tell you almost as much as a security rating.

“What is odd though is sometimes you’ll find insurers behaving in a way that you find pretty unhelpful, but they’ve got a very good security rating and that tells you something; the security rating is only part of the equation.”

Brokers being able to adequately judge the insurers they partner with is essential, Flaxman continued. His firm, for example, deals with distressed claims – last year, it handled eight cases regarding brokers that were being sued for using unrated insurers.

With this in mind, Peter Hughes, founding director at Litmus Analysis, added that brokers are the biggest drivers when it comes to insurers being rated, as insurance firms believe brokers will place more business with them if they are rated; the current market assumption is that unrated insurers are unsafe insurers.

Flaxman added that brokers have the most vulnerable position when it comes to using an unrated insurer that then won’t pay out on a claim; this is because the broker has assured its client that the business could be safely placed with the selected insurer, which has then been proven to be false.

Mitigating against using unrated insurers

For Steve White, chief executive at Biba, the most important thing when brokers are considering using an unrated insurer is that they complete their due diligence and are then clear to their customer about the results. Even if brokers themselves do not use unrated insurers, their competitors – who may place business purely on price – may do so, which means this section of the market should still be investigated.

To mitigate the potential backlash of using an unrated insurer if the firm suddenly closes or refuses to pay a claim, brokers should ensure they keep a detailed record of their decision-making process and clearly communicate their reasoning, as well as the possible risks, to their clients.

This includes if brokers are working for sophisticated clients – in the eyes of the law, the broker is the one with all of the expertise, knowledge and trust, so will also be the one, therefore, to take the fall should something go amiss.

Ratings as a guide

Although the panel predicted that Brexit could lead to a decrease in unrated insurers, Flaxman emphasised that brokers’ just placing information about unrated insurers in terms and conditions documents is not a “get out of jail free card”.

For example, a broker may have an internal policy about not using unrated insurers, which is then mentioned within contract terms and conditions, however its client may have asked for the cheapest arrangement possible when engaging the broker. The lowest price may be with an unrated insurer, so if the broker does not explore this option, it could find itself in hot water legally for not clarifying or communicating this sufficiently to customers.

Flaxman concluded: “[The] rating itself is not the full picture. There’s a lot more to the security of an insurer than just its rating. The problem, and this is an industry problem, the industry – particularly in the last 15, 20 years – is that we’ve become a tick box culture and a lot of people like the idea of saying ‘there’s the ratings, I can tick the box and say I’ve done it’. I would say to you don’t think of it like that. It’s a very good guide, but that’s about as far as it will go.

“Some of the best insurers have some pretty flaky moments, and as a broker, you’re accountable for selecting the insurer, not just on its rating, but on it’s overall quality and performance and the fact you can stand up and say to a client ‘I wanted you to be insured with those people for these reasons.”