With additional insurance options come greater broker responsibilities

It is commonly misunderstood that the overriding reason for the appointment of the insurance intermediary is to provide the most cost effective insurance protection for his principal.

However, the obligations of the broker extend far and beyond that of a cost effective purchaser. His responsibilities are, in fact, vast and onerous.

As the professional agent to the insured, he is firstly required to demonstrate that he has conducted a full needs analysis for the client. Following this probative exercise he must engage with the client on risks identified, and then recommend appropriate insurance solutions that eliminate or significantly reduce the impact of the occurrence of the identified perils. In response to this proposal, insurance policies are then purchased and the insured is protected to the extent that these products match his exposures.

These brokers’ duties have always been evident, but in recent years our regulators have introduced substantial legislation that clarifiy and codify the responsibilities of the broker. Failure to meet these provisions may adversely impact on the reputation of the broker, result in punitive regulatory measures and lead to costly court proceedings.

Some of the real challenges the broker now faces include,

· Has he interrogated the risks of his clients sufficiently?
· Did he exercise due diligence and caution in recommending the product?
· Does the policy afford the insured sufficient protection?
· Are the terms of the policy and shortfalls understood and adequately explained?
· When changing products or insurance suppliers is any cover lost in the process?
· Is the client aware of the consequences of insuring with insurer A over B?

Until fairly recently, it was much easier for the commercial broker to largely meet these obligations. A market standardised policy was used and it allowed the broker to compare on price and endorsement to this uniform offering. Fear of breach of the Competitions Act has removed this as an option. Proper scrutiny by the broker is now demanded, as insurers offer different products with varying degrees of protection. Price is merely a single factor. All products are not created equally.

To demonstrate, a client may receive a quote from his broker with the promise of a 20% premium saving. The broker recommends the change in policy and insurance provider merely and myopically to prove his value, but fails to interrogate and explain to the insured the gaps created by the move. Actual such cases are experienced every day.

One example relates to a particular public liability policy whereby the replacement policy had no products recall cover, despite that the expiring applicable extension had previously been operative. Here, the manufacturer of automotive components was forced to recall vehicle parts at the cost of many millions of rand. His loss was incurred to achieve an annual premium saving of approximately R100 000.

With regards to specialist insurance products, the broker is encouraged to use providers who themselves are specialists. Collaborative engagement should then follow to agree on the most appropriate solution and policy. This may involve looking after the interests of the client by properly and thoroughly investigating his risk exposures and then recommending a solution that, when put to the test, will respond with minimal adverse impact to his business.

One may look at the basis of indemnity for the truck insured. Is his claim to be settled on a market value which may be disputed and totally inadequate for replacement purposes? Were this to be the case, would he then be able to afford the costs of a higher valued vehicle to perform the same business activities and generate the same income that he earned prior to the occurrence incident? Has adequate allowance been made for towing, hiring a replacement vehicle or lost revenue?

In short, the broker must ensure that he properly executes his obligations not only on price but based on the needs of his clients. At HCV, we collaborate with you to determine the right product for your client, at the right price.