Harder hit by recession than most other industries, the short-term insurance industry is also facing ever-stricter regulation and numerous challenges to ensuring sustainability. Insurers are not afraid to share this burden through their distribution channel.
Barry Taylor, chairman of the short-term executive committee and director at the Financial Intermediaries Association (FIA) believes some insurers will react to the changes and challenges faced by the short-term industry by altering the way they do business with brokers.
“When consumers suffer they cut back on premiums, meaning insurance companies need to find new ways to hold down costs,” he says. Inevitably, these cost-cutting measures will impact on the broker and the final consumer.
Claims under scrutiny
In the prevailing economic conditions, hiking premiums is out of the question. So, short-term insurers have no choice but to tighten up their claims settlement processes. Says Taylor: “While this does not necessarily mean valid claims will be rejected, it is likely that claims staff will apply an extra layer of vigilance when assessing the quantum of each claim.” This scrutiny will place brokers under further pressure.
Insurance brokers are a vital link between the insurer and the policyholder – stakeholders with clearly different interests. On the one side insurers will be appealing to brokers to assist in minimising claims, while on the other, the broker will be fighting for the client’s contractual rights. “A broker has a primary duty to point out and motivate against opportunistic interpretation by underwriters to the detriment of their clients,” comments Taylor.
Critical mass
Certain insurers are revising the terms of their agreements with brokers. It’s become commonplace for insurers to increase minimum targets for brokers to justify servicing costs. Some have even cancelled “dormant” intermediary contracts. Is this acceptable practice? “To a certain extent,” says Taylor. Insurers are in the business of making money, so it makes sense for them to strive for efficiencies of scale by ensuring each “book” has critical mass.
“Another risk intermediaries need to be aware of is that of insurers cancelling policies if loss ratios become unacceptably high,” notes Taylor. It’s a daunting prospect for brokers, especially when you consider how the loss ratio debate impacts decisions. Can a broker really “accept responsibility for maintaining the balance between premiums and claims and act in the best interests of their clients in arranging suitable cover” at the same time?
Insurers breaching regulations?
If an insurer sticks to strict minimum targets, we could see an alarming number of “orphans” among short-term industry stakeholders. Insurance intermediaries aren’t happy with the often heavy-handed intervention from production providers – they believe any decision to “cut” a broker based on the business written contravenes FAIS, because it forces the broker to ignore the clients’ interests and place business with a single provider.
Taylor isn’t so sure: “This is clearly a commercial decision made by the insurer which is unlikely to be in breach of any regulations.”
But we can think of another problem. The Treating Customers Fairly (TCF) legislation proposed by the FSB frowns upon product provider practices that prevent ongoing service and advice to consumers. By cutting out the broker the insurer also leaves the policyholder high and dry!
Finding solutions
What can brokers do? One solution is to look for merger or joint venture opportunities.
Taylor concludes there are multiple risks for intermediaries operating in a today’s economic environment. Brokers will have to fulfil their role in the market by continuously seeking the best solution for clients while prudently choosing the best business partner to carry the risk.
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