Insurance brokers: Between a rock and a hard place

South Africa’s financial intermediaries face an uphill struggle in managing their own liability risks due to market forces that are largely out of their control. The liability market is influenced by a range of complex factors, further complicated by the rising frequency and severity of losses and claims that typically span multiple years. A panel discussion at the 2021 FIA Virtual Advice Summit set out to demystify liability and the capacity in the market surrounding liability insurance, as well as to reflect on the growing advice-related liability exposures that advisers and brokers face. The overarching objective was to promote sustainable, broker-led risk transfer and risk management for the end-customer, the insured.

Laying the groundwork…

Before putting his fellow panellists to the test, Steve von Roretz, Director at Leppard Underwriting, took a moment to define the customer in the complex liability insurance landscape. “The reinsurer’s direct customers include the UMA and the insurer, both product suppliers … from a UMA and insurer perspective, the customer is the broker whereas the broker’s exposure is to the insured,” he said. He took a thinly veiled swipe at the regulator in reiterating that many industry stakeholders saw the UMA as a product supplier rather than an intermediary. The panel then set about discussing three critical issues affecting the liability insurance market, namely: reinsurance; skills in the insurance and reinsurance market; and the impact of technology. 

“We are seeing a more conservative approach, or hardening up of the reinsurance markets, which has led to limited capacity,” said Adelle Hartley, general manager at Envirosure. She added that many risks were no longer allowed on treaties, and that insureds faced a growing list of exclusions, warranties and terms and conditions, some of which coincided with the pandemic outbreak. And in extreme cases, large insurers are no longer prepared to write certain types of specialised liability covers. Although these conditions create opportunities for niche insurers and UMAs, there are growing concerns that certain risks could become uninsurable. 

The hard market, soft market debate

Hartley pointed out that insurers were reluctant to take on large risks on their own account, usually insisting on participation. In this context, the liability market could witness a growing reliance on self-insurance, where companies take on larger portions of their risk on balance sheet. “The reinsurers are dictating terms down on to the insurers, on to the brokers and ultimately affecting the broker’s client,” said Hartley. Are insurers or reinsurers to blame for the cover the current cover ‘squeeze’? For the brokers on the panel, assigning blame was less important than the impacts that hardening markets were having on their businesses. 

“It is really difficult to sit in front of a client these days and try and sell a 50%, 60% or 100% increase in premium when the deductibles are doubling,” said Teri Solomon, Finpro Practice Leader at Marsh Speciality. She agreed with Hartley that brokers were plying their trade in a hardening market. Von Roretz was not convinced. He suggested that rather than facing a hardening market due to capacity constraints, the industry was experiencing “a sectoral hardening at the bottom end”. We will leave it to the insurance professionals among you to decipher that comment… What we can say, is whether or not the market is hardening, brokers are nowadays scrambling to find carriers to place complex, large risks. And the fast pace of changes to cover, exclusions and premiums driven by insurers and reinsurers exposes brokers to significant advice risk. 

It emerged that insurers are also struggling to transfer risk presently. “Insurers and UMAs cannot sustain large limit losses on their balance sheets, so we have to buy protection in the form of reinsurance,” said Malcolm Padayachee, Business Head: PI and General Liability at SHA. He admitted that SHA had seen its share of challenges when negotiating reinsurance renewals. Padayachee cast his vote for hardening markets, siting the increased cost of claims; low underwriting profits as a result of years of soft market conditions; and low global interest rates and poor investment income as reasons for the phenomenon. The result, which affects both broker and insurer, is a restriction in both capacity and cover, and an increase in price. 

The skewing of sustainability

One of the issues raised during the conversation was that reinsurers, in attempts to achieve sustainability across their business footprints, were causing ructions in other segments of the insurance value chain. Reinsurers’ responses to rising claims has been to hike premiums, introduce comprehensive new exclusions and raise deductibles, among other steps. Solomon argued that if reinsurers continue to push restrictive terms on to the insured, the industry would have to think outside the box insofar risk transfer mechanisms. One solution could be to advise insureds to retain rather than transfer certain risks. 

“The risk to brokers is becoming increasingly complex too, not only in terms of what they need to communicate to their clients; but also in terms of their own exposures,” said Von Roretz. Post-pandemic court decisions about broker exposure and broker liability present BREAK challenges to intermediaries who are required by regulation to have professional indemnity cover in place. Solomon pointed out that brokers’ PI exposures were enormous: “brokers cannot be held responsible for everything that goes wrong in the market, because eventually they are not going to be able to buy any kind of liability insurance”. She added that the increases in premium and deductibles on brokers’ PI cover were not sustainable. 

Turning to skills and technology for solutions

The hard market has exacerbated skills shortages at brokers, insurers and reinsurers. “We are experiencing a lack of specialised skills in general; but also a lack of negotiation skills,” said Solomon. “Brokers lack the ability to have the difficult conversation with the insurer and with clients”. It is thus more important than ever for brokers to inform their clients about their roles and responsibilities… “If we do not clarify things by way of formal agreements, standard terms and conditions and limiting liability and exposure to systemic risk, then brokers are going to be blamed for all sorts of mistakes going forward,” said Padayachee. 

Technology will become a key differentiator in the risk advice space. Padayachee pointed out that insurer and UMA systems can empower brokers by providing fast and efficient risk solutions; generating rich data to inform better underwriting decisions; and facilitate seamless quoting. “Clients want things done faster; but they still want to be part of the process,” noted Harvey. “But as much as technology comes in, [we still] need specialised partners that can assess the risk and then custom underwrite that risk in partnership with the broker”.

The panel concluded with some remarks on ethics and integrity, with brokers encouraged to pay close attention to compliance. “We have seen a lot of PI claims coming from intermediaries where there was complete non-compliance with the law and with their own internal compliance processes,” concluded Solomon. “You have to work with integrity… You have to operate your business with integrity, otherwise it is going to come back to bite you at some point”. 

Writer’s thoughts:
The FIA Virtual Summit panel debate did not delve too deeply into PI cover, despite this being ‘top of mind’ among many of its intermediary members. One of the issues I struggle with is how to balance the legal, regulatory requirement for brokers to take out PI cover versus the free market premium-setting in the liability insurance space. What happens when the cost of your advice risk cover becomes unaffordable? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za

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