Brokers Dont Need Crystal Ball To Protect Client Interests

Brokers Dont Need Crystal Ball To Protect Client Interests

Despite the fact that premiums continue to rise, pushing commission income up as well, agents and brokers are feeling anything but copacetic these days.

How can agents sleep soundly after hearing that 38 p-c insurers were either placed under regulatory supervision or into liquidation last year, according to a report by A.M. Best Company, up nearly 25 percent from each of the prior two years? At the same time, we've seen a growing number of major carriers hit with rating downgrades.

These developments should not surprise anyone, not after “several years of inadequate pricing, escalating loss costs, and the need to strengthen loss reserves,” which “fueled declining operating profitability and further weakened balance-sheet strength,” according to the Best report, “Rising Number of P-C Company Impairments Continues Trend.”

It's not going to get any easier anytime soon, Best noted, as market conditions and economic volatility will make it hard for p-c carriers to maintain strong balance sheets.

In the meantime, reinsurance collectibility is an issue that could further undermine primary carrier stability. Indeed, Steve Dreyer, credit analyst and insurance practice leader at Standard & Poor's Ratings Services in New York, warned recently that p-c insurers have not fully accounted for the likelihood that reinsurers might dispute certain claims.

“In the same breath that they are announcing staggering multibillion-dollar reserve increases, insurers are saying, 'Don't worry, reinsurers are going to pay for nearly all of it,'” Mr. Dreyer told the National Insurance Leadership Symposium, sponsored by The Council of Insurance Agents & Brokers in association with the Reinsurance Association of America, the American Insurance Association and Russell Miller.

“We are not convinced that the reinsurers of this business written many years ago–if they even exist today–will be so agreeable,” he added.

Mr. Dreyer said that while most carriers have acknowledged and accounted for some reinsurers being unable to pay, they have not accounted fully for the likelihood that reinsurers might dispute a number of claims.

Where does all this leave agents and brokers? Insurance buyers expect them to be their watchdogs, giving them a reasonable expectation that their carriers will be around to pay claims, or at least a head's up that a particular company should be avoided. Mr. Dreyer said there is no magic predictor of insurer troubles. However, short of a crystal ball, he cited some early warning signs to monitor.

Beyond touting the value of S&P's financial strength ratings, he urged brokers to pay attention to “market information,” such as pricing behavior “that is clearly out of synch with the rest of the marketeven downright irrational,” as well as the way financial markets treat insurer securities.

Buyers are desperate for affordable coverage in a hard market, but it is up to agents and brokers to do their due diligence and make sure clients understand that price and coverage do not necessarily trump security when making a purchase decision. Failure to take this extra step could leave intermediaries with E&O claims down the road.

Reproduced from National Underwriter Edition, March 24, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.