The old saying that “you get what you pay for” runs very true with insurance and is magnified by a number of high profile insurer collapses in recent years such as:-
- Gable
- Enterprise
- Quinn
- Lemma
- Balva
- ERIC
- And many more....
All of these companies have become insolvent where their capital has been eroded to a point where it is unlikely they can meet their liabilities. The most objective measure of a firm’s security is their rating. The existence of a rating indicates that the firm has been assessed by an independent rating agency.
Are you content to make one of the most important purchasing decisions for your business blindfolded?
And what are some of the danger signs that identify those companies at risk?
Here are just a few points to consider when presented with an unrated insurer:-
- New company—an insurance company that has just started trading should be seen as extremely high risk.
- Winners curse— consistent selection of the cheapest premium by the broker with the same market can point to longer term problems.
- Rapid expansion - uncontrolled growth is a proven symptom of failure. The easy way to grow quickly is to charge less than everyone else.
- Expansion into new products - many an insurer has been brought to its knees by trying to expand into areas other than the ones in which it has expertise.
- Giving away the underwriting pen - fundamental lack controls have contributed to the demise of insurers.
- Under-reserving claims — an insurer needs to set aside enough of the premiums to allow fully for the cost of all claims. Is there a delay in claim payments?
- Market rumour - there is anecdotal evidence that problems at an insurance company can be the first signs of an impending demise of the company.
- Pedigree of underwriter - an unknown market underwriter or someone who does not have a proven track record can point to short term existence.
What can be done to prevent future insuring with a doomed insurer?
Select the right broker. Do they offer you informative advice and have they ever had circumstances where they have placed policyholders with insurers who have collapsed?
Has this happened to them before? And how many times?
What is the quality and track record of the management team of the insurer?
Are you able via your broker to review their audited accounts and reinsurance programme?
Are the senior individuals of the insurer known and do they have the pedigree to run a successful business?
There are times when it is appropriate to use an unrated insurer. They can be more innovative and have flexibility in a particular class of business and do not have the additional cost of the bureaucracy of larger established businesses. Just ensure you have all the facts to hand as not all insurers are equal and you do generally get what you pay for.
Over the past 20 years we have not been faced with the problems of finding alternative cover for clients with collapsed insurers or had to make those difficult phone calls to clients to advise of lost premium/claims or unable to find alternative cover.
Hopefully this has been down to more than just luck!
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