Agents Responses To Insurer Downgrades More Than Meets The Eye

Fundamentally, says Robert P. Hartwig, vice president and chief economist with the Insurance Information Institute Inc. in New York City, the main concern clients have is getting their claims paid. And its not the short-term claims, but the occurrence claim that comes to light three, five or 10 years after a policy was in effect.

Legally, he said, insurance brokers have a responsibility to place their clients risk with an insurer "who in their best judgment is sound and solvent" or else the broker can be found negligent and be sued. However, Mr. Hartwig noted, if the client is adamant in its request to be placed with a certain carrier, then the broker is off the hook. But, he added, "brokers are loath to place business with an insurer below A in terms of rating."

As a rule, the largest insurance brokerage firms advise their clients of downgrades during the life of a policy and ask clients if they wish the broker to find other coverage," said Mr. Hartwig.

"Its a policy not stated in law, but brokers do this as if it were a contractual obligation making it part of their ordinary business practice," Mr. Hartwig said. "The notification is automatic."

However, some risk managers say they do not wait for their brokers to advise them of downgrades, preferring to take their own pulse of the marketplace. And there is also the ethical dilemma agents can face, say scholars, who see conflicting loyalties that can go beyond just statutory obligations.

Wayne Salen, risk manager for Home Quality Management, a long term and elderly care firm based in West Palm Beach, Fla., said his own experience with insolvent insurers, Reliance Group being a classic example, has taught him to do his own monitoring of the market beyond what brokers tell him. His philosophy is to move his risk immediately if there is a scent of a problem that could jeopardize his placement.

"We are risk managers and we should know the marketplace–both the opportunities and the problems," said Mr. Salen, who is also on the board of director of Risk Insurance Managers Society Inc. based in New York City and chairman of its external affairs team. "If we find ourselves as a co-defendant in a suit because a carrier could not cover a claim, my CEO is not going to say the broker screwed up."

He was critical of some risk managers who do not take the time to do the research and keep abreast of what is happening in the insurance market.

"Not enough risk managers spend the time looking at the markets. Its just a matter of making connections and justifying it to your company," said Mr. Salen. "Its especially important if you are talking about millions of dollars in potential losses."

However, others have a different outlook on downgrades.

"We look at downgrading and take a cautious position," said Joe Hardy, director of risk management and insurance with Hudsons Bay Co., a general merchandise retailer in Toronto, Canada. "We have been put in the same position as some insurers [and understand what it can do to your business]. We do not agree, all the time, with the formula and method of downgrade."

Mr. Hardy said his company assumes a partnership role with its brokers concerning the evaluation of carriers, and is not looking to "pull the plug too soon."

"We want a pretty good reason before deciding what we want to do–either getting a new insurer or keeping what we have and riding out the storm," Mr. Hardy noted.

Both risk managers said it is crucial to know not only the condition of their primary carrier, but also the reinsurance placements going with their account, and to ask a lot of questions.

"Dont be afraid to ask the questions, and if you are not happy with the answers, dissolve the partnership," advised Mr. Hardy.

The primary ethical responsibility of the broker is the legal one, said Peter R. Kensicki, professor of insurance at Eastern Kentucky University in Richmond, Ky. An agent should know the rating quality of an insurer at the time of placement and transmit that information to the client. But when it comes to a question about solvency, "that responsibility lies not with the agent, but the regulator."

"There is the obvious situation where I know [as an agent] a company is going into receivership. I would want to move the insurance where I could to protect the business Ive written and I would suggest a move to my client," observed Mr. Kensicki.

Dr. James Kallman, professor at the School of Risk Management, a part of St. Johns University in New York City, noted that responsibilities of fidelity differ depending on whether the individual is an agent or a broker.

For an agent, as a representative appointed by the company, the principal obligation lies in protecting the company appointment. A broker, on the other hand, serves his or her client and does not have the same obligation to the company.

Blurring the distinction is the situation where an agent charges its customer fees for services. Then the agent would be a broker "reporting to two masters," said Mr. Kallman.

Normally there are written agreements outlining the relationships, and attorneys are best to determine the agents obligations, he added, stressing his is only an academic opinion.

"From an ethical perspective, it does not matter what label one puts on the business card," observed Mr. Kallman. "From a humanitarian perspective, agents and brokers should strive to full disclosure."

The challenge, he said, lies in if the disclosed information leads to further erosion of the carriers business and is not in the best interest of the company, violating the agents fidelity agreement with the company.

This is an issue that he has broached many times in his own classes, and students are often evenly divided over what action they might take in advising clients when a companys rating is downgraded from an "A" to "B." Some do not want to take action that would further impair the underwriters business and possibly hurt the client at some point, he said, while others would prepare to move the business elsewhere.

"There is not a general consensus," said Mr. Kallman.

One helpful text agents and brokers might turn to is called CPCU 530 text covering this issue, he advised.

"My own personal opinion is that full disclosure is more important," he added.

Reproduced from National Underwriter Edition, May 5, 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.