Know your client - know your insurer

Times and conditions are tough. Many in the UK insurance industry are looking for a glimmer of rate hardening with the same eagerness as the rest of the population searched the skies for signs of summer. Some have pragmatically taken the view that drastic times call for drastic measures and, for many brokers, that means using unrated non-UK based capital. However, the fact is that in doing so they may be solving one problem only to exchange it for something potentially far worse down the line.

As a premium financier, I am asked to provide terms for some of these new entrants and I find it worrying how difficult it is to trace any financial substance on some of them. With no Association of British Insurers membership, credit rating or other confirmable information, how can brokers be certain their clients will be well-served by them in the event of a claim? If brokers are not certain, what excuse will they give should the regulator inquire: "Did you treat your customers fairly?"

Recently, I saw a case involving a hotel, insured for the last four years for a premium of £100,000, go on cover for £25,000. The cliche, if it looks too good to be true it probably is, came quickly to mind and it is baffling quite how these carriers charging such low rates can build up the requisite reserves to pay claims. History as uncomfortably recent as 2005 shows non-payment can happen, as it did in the aftermath of the floods at Boscastle. It was then that, despite the intervention of the British Insurance Brokers' Association, a customer class action to pursue one particular non-paying foreign insurer failed to materialise due to there being next to no chance of success.

When insurers fail to pay claims, policyholders will look to pin it on the broker who sold the policy and recommended the insurer. Then it could be their PI insurer which picks up the tab and that will penalise the broker at subsequent renewals - in effect - for their poor choice of provider.

Brokers are obviously under tremendous pressure and some are taking this short-term easier route just to see themselves through the lean times. However, taking a risk, even if it is a calculated one for a limited period, is still taking a risk. The policyholder may initially be thrilled at the cheap premium but at what cost ultimately?

It would be a great shame if brokers and their customers fall foul of potential and foreseeable misfortune because competitive pressures got the better of some brokers' judgement. I hope brokers do not gamble such long-term risk for short-term reward. I also hope as an industry, we can look back at this difficult period and say brokers avoided trouble because they were prudent, not because they were lucky and got away with it.

- Lloyd Hanks, Sales and marketing director, Aascent.