Ashwin Mistry argues brokers who use unrated providers should pay higher fees
A lot of capital flows into the UK insurance industry every day from all over the world.
With gross premiums in the general insurance market nudging £60bn, that’s hardly surprising. And a lot of money comes and goes throughout the market cycle. New money arrives when a provider persuades investors that it can focus on gaps or niches that no one else has got their eyes on and provide a high rate of return.
If they are right it’s a win-win. If they are not, everyone loses, including their policyholders. And policyholders lose far more seriously if the capital provider is unrated.
The collapse of Alpha Insurance once again raises the issue of unrated insurers and whether brokers should be using them. Alpha was one of the cherry pickers: one of its niches was cover for self-employed taxi drivers.
The company traded on ‘competitive’ pricing, hooking deals like trout in a fish farm. And, when the collapse came, thousands of taxi operators were told they had no insurance and were driving illegally.
The resulting media coverage delivered another blow to the reputation of the entire sector. Once again the public image of the insurance industry is tarnished and appears on the front pages of newspapers for all the wrong reasons.
So what’s the remedy? Should the regulator step in and police unrated markets? My answer to that is yes, but it’s unlikely to happen. With such a vast amount of activity already taking place in the regulated space, I see very little appetite for taking on this issue unless the industry itself makes a concerted effort to force it up the list of priorities. That is only likely to happen in the case of a truly catastrophic collapse.
The company traded on ‘competitive’ pricing, hooking deals like trout in a fish farm
Relatively small bankruptcies such as Alpha and Gable can be more easily absorbed without forcing through uncomfortable new measures. If a large unrated provider were to go bust, the reaction would be seismic.
Brokers, to my mind, have a key responsibility to flag up all the risks involved with unrated insurers. It’s morally unacceptable to fall back on caveat emptor when the policyholder goes into the deal with only half the story. Yes, it was the cheapest in the market by far, but was it mentioned that there may be issues of security?
Ask the taxi drivers. They’ll say they paid their premiums in good faith and that their brokers have a role to fulfil. In steering their clients in the direction of unrated providers without flagging up the risk, brokers bear a large part of the responsibility for the outcome.
Two years ago when Gable went under, the Financial Services Compensation Scheme paid out £16.5m to 60,000 policyholders. Whether or not the FSCS will pay out again on Alpha remains to be seen, but if they do it raises the important point that brokers who never deal in the unregulated market will be subsidising those who do through the fees they pay to the regulator.
Not only is that blatantly unfair but it also undermines the motivation for reform. Either brokers who support unrated capacity providers should pay a higher FSCS levy or the unrated companies themselves should be required to get cover for insolvency.
Ashwin Mistry is chairman of Brokerbility
Whether or not unrated providers should be used by brokers is a debate that rears its head regularly in the sector. It’s true that broker fees go towards picking up the pieces when a collapse happens – the FSCS paid £16.5m to Gable policyholders in 2017. It’s right to ask now if the fee structure supporting these payments is fair to all that pay in.
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