trending Market Intelligence /marketintelligence/en/news-insights/trending/DhHFh4dqXcvPAUV6njJ86A2 content esgSubNav
In This List

UK brokers could shun unrated, overseas insurers after latest collapse

Blog

The Big Picture 2022 Insurance Industry Outlook

Podcast

Next in Tech | Episode 37: Insurance impacts on technology and vice versa

Case Study

A Prestigious Global Business School Gains a Competitive Edge

Video

S&P Capital IQ Pro | Unrivaled Sector Coverage


UK brokers could shun unrated, overseas insurers after latest collapse

U.K. insurance brokers could start pulling away from unrated, overseas insurers as pressures mount following the high-profile collapse of Denmark-based Alpha Insurance A/S in May.

The failure of Alpha on May 8 left 700 taxi drivers and 10,000 minicab drivers in the U.K. without insurance cover, according to the BBC. It is the latest of a series of collapses that have affected U.K. policyholders, including those of Liechtenstein-based Gable Insurance AG and Gibraltar's Enterprise Insurance Co., which both failed in 2016.

Although not the first sign of trouble, the issue was placed in the public eye by nationally broadcast images of taxi drivers queuing outside the London office of Protector Policies, the U.K. broker that had placed business with Alpha, in the hope of getting replacement cover to continue doing their jobs. This in turn could spur the regulator of U.K. brokers, the Financial Conduct Authority, or FCA, to get tougher with those that place business with weaker insurers.

Under pressure

While stopping short of saying he expected regulatory action as a result of Alpha, British Insurance Brokers' Association, or Biba, CEO Steve White said in an interview: "If the broader media pick up on the problem, the politicians will pick up on the problem. That inevitably leads to pressure on the regulator to do something. I'm pretty confident that this will not have gone unnoticed by the regulator."

The FCA has already shown a desire to tackle the problem of overseas insurer collapses hitting U.K. policyholders, but neither it nor the Prudential Regulation Authority, or PRA, which is responsible for ensuring the financial soundness of U.K.-domiciled insurers, has the power to impose restrictions on the insurers themselves. Most of the trouble has been caused by financially weak insurers entering the U.K. through the European Economic Area, or EEA, passporting system, which allows insurers to trade across the EEA under the license from their home country.

The most likely target for regulatory penalties would therefore be the U.K. brokers that place business with the problem insurers. The FCA has proposed requiring brokers to pay a levy to the U.K. Financial Services Compensation Scheme, or FSCS, which pays financial services companies' dues to customers when the firms themselves cannot, for using unrated insurers, but the regulator dropped the plan in October 2017 after consultation responses pointed out that a lack of a financial strength rating was not necessarily a sign of financial weakness.

The question is whether, after Alpha, the FCA will try again, but with more precise terminology. Terence Clark, compliance director at consultancy RWA Compliance, said in an interview: "The FCA will look to the market to sort its own house out, which is ultimately what everybody wants. [Brokers] don't want the FCA interfering and neither does the FCA want to interfere. But if [the FCA] saw any real evidence of brokers not heeding the messages, that FSCS proposal may well be back on the cards or there may well be much more rules-based intervention."

The FCA was approached for comment but did not respond.

Charles Manchester, CEO of underwriting agency Manchester Underwriting Management, which offers professional indemnity cover to brokers, said: "Brokers are more in the firing line than they ever were." He noted recent news reports that the Danish equivalent of the FSCS, Garantifonden, was pursuing U.K.-based Howden Insurance Brokers Ltd.'s Swedish operation and Lloyd's of London insurer Barbican to recoup money it had paid out for the collapse of Gable, and said he suspected that the FSCS would similarly start pursuing brokers "in the long run, particularly the bigger brokers."

'Shying away'

As well as facing greater regulatory pressure, brokers are also having to answer tougher questions from the insurers providing their professional indemnity, or PI, cover, and so will foot the bill for any negligence claims from customers.

Clark said: "We are seeing PI insurers asking brokers specifically: 'Do you use these insurers and if so what due diligence have you undertaken?' We have also seen PI insurers asking: 'Can we see your letters and your scripts where you are giving all these warnings'" to customers about the risks of using unrated, overseas insurers. "These are relatively new developments."

As a result of the mounting pressure, Clark said, "What we are starting to see is a lot of insurance brokers are shying away from the unrated, overseas or weaker insurers." He added: "One or two of the clients I speak to are starting to move away from overseas and unrated insurers because of these exact issues. It is just not worth the hassle as far as they are concerned."

Brexit to the rescue?

Perhaps paradoxically, the pressure on brokers, and U.K. policyholders, from failing insurers could be alleviated by the U.K.'s exit from the European Union. Passporting, which is how the bulk of the problem insurers have accessed the U.K. market, is expected to be lost, and although this has broadly been viewed as a negative by the insurance industry, Biba's White noted one possible upside.

"If we move into a world where we're not passporting, then insurers will have to be directly authorized and regulated by the PRA," he said. "So some of the very poorly capitalized insurers that we may have had a problem with that have passported in won't be able to do that going forward. I'm sure that will help alleviate some of the problem."