We expect insurance brokers to demonstrate that they have carefully considered the insurers that they place their customers’ business with.
Suitable due diligence is a key part of the process that we expect insurance brokers to perform on the insurance companies they use.
Our main concern is the risk to customers in the event the insurer fails and are unable to pay claims.
The failures of Alpha[2], Enterprise[3] and Gable[4], demonstrated the harm that can be caused to customers as over 1 million policyholders had to find alternative insurance cover.
Insurance brokers have a vital role to play. The customer sees brokers as trusted professional advisers and experts on insurance matters. We expect brokers to be able to demonstrate that suitable due diligence has been performed on the insurers that they place their customers’ business with.
Examples of due diligence
Here are some examples of what brokers should consider as part of their insurer due diligence:
- Insurers' Solvency and Financial Condition Report: A key figure and indicator is the solvency coverage percentage.
- FCA and Financial Ombudsman Service (FOS) complaints data: This will give an indication on how insurers treat their customers.
- Audited accounts of insurers[5]: UK company accounts are filed at Companies House, but there may not be an equivalent for overseas firms. If the accounts are not available, ask yourself whether you are comfortable doing business with them.
- BIBA’s Litmus test[6]: This provides some financial analysis of unrated insurers and a comparison of financial ratios against the wider insurance market.
- FCA Register[7]: Check if the insurer has passported in on a branch or a services basis. UK firms, and firms passporting in on a branch basis are automatically covered by FOS. Firms passporting on a services basis can elect to come under the Voluntary Jurisdiction of the FOS. Check if your firm is covered by FOS. If not, check if there is a dispute resolution scheme in the home state, and whether UK customers are eligible.
Give customers clear insurer details
We expect brokers to clearly detail the name and address of the insurer in the literature provided to customers. We have seen examples where some brokers think the Managing General Agent (MGA) is the insurer and are not aware of the insurer behind the MGA.
As brokers, you should be comfortable that you are placing your customers’ business with an insurer where you would be happy to be a policyholder.
We are planning to do further work to verify that insurance brokers are conducting appropriate due diligence on the insurers they use.