A supplier chain reaction

The commercial insurance market currently faces a myriad of issues, for which a whole raft of long-term solutions has been suggested. These problems will not go away and it would be foolhardy to expect the government to step in with a universal panacea.

Brokers and their clients have a vital role to play in stopping this sector from haemorrhaging. If not, trade associations and organisations are seriously considering setting up captives, depriving brokers and insurers of clients and premium income.

Underwriters have suffered because commercial insurance has been underwritten unprofitably for years, as insurers wrote for premium income without due regard for realistic rates or appropriate risk management. But insurers have now gone to the other extreme and are applying service terms, adversely affecting brokers and policyholders.

Insurers must notify brokers of the terms they are offering well before renewal. Brokers need compelling arguments to explain what appear to be unfair increases to clients. Whether brokers can carry those increases is another matter.

Brokers have an obligation to try to better the terms if they have changed radically. They should then explain to clients that they cannot improve the existing insurer's offering, or find an alternative. Clients will not tolerate inactivity.

Smaller brokers are having problems placing commercial risks because they can only offer insurers small accounts. Often a call centre response is all they can get, which sits badly with the bespoke underwriting that commercial lines have to require.

As a result, smaller brokers are having to spread their commercial accounts even wider, using specialist facilities. This sometimes means going through a whole chain of suppliers before a risk reaches underwriters - often the same underwriter that was reluctant to take the risk in the first place.

However, brokers must be careful in their choice of supplier chain. As we all know, there have been major problems associated with chains.

Networks will probably be part of the future for smaller brokers, offering a way of accessing the security of a volume purchaser without losing their local names and reputations.

Networks provide small brokers with market capacity and best rate availability, meaning they no longer have to spend huge amounts of time chasing reluctant underwriters or insurers. And, as small brokers are only too aware, time spent chasing insurers erodes profit margins, already hit by compliance requirements, falling personal lines commissions, increased cost of working and rising professional indemnity insurance premiums.

But, as with most solutions, there are pluses and minuses. There are good and bad networks, clever sources of secure capacity and weaker players with inferior credit ratings, new creative ideas and hackneyed, tired approaches.

Insurers have to perform for their shareholders, while offering volume product at sensible prices. Brokers have to make a profit for owners and investors. Companies need to make a profit over and above their insurance premiums. Everyone has the same objective - the trick is making the cash spread far enough.