nsurance brokers are in a bind. Time was that they knew the client, the client knew him or her, and the broker made a good commission from placing the company’s policy. Today it is different.
The broker still says he will assist the company to find good cover, but in fact he or she is often hopelessly conflicted. Clients pay the broker a fee but often fail to realise these same brokers can make more money through multiple payments from those very same insurers they are meant to keep at arm’s length.
It is partly because public companies have much less resilience than they did 10 or more years ago. The financial crisis has made firms focus on cost cutting. This means they have taken out redundancy — men and machines who knew how things worked — and instead they focus on lean supply chains and outsourcing.
Companies are shadows of their former selves. That is okay provided everything works as it should, but if something goes wrong, there is nobody there any more to intervene and sort it out because they have been made redundant. Hence much less resilience.
This in turn means much bigger insurance claims when things do go wrong, as inevitably they do from time to time. Instead of being a small incident, it becomes a major one. Indeed that is what is happening today; fewer claims, but much bigger.
The second issue is quantitative easing, the huge amounts of money poured into the financial system by the Bank of England to shore it up. Among other issues, QE has lowered interest rates, and this has made people search for new ways to make a bit more money. Insurance is one of these areas. Huge amounts of capital have come in.
But that of course means that insurance is now much less profitable. Premiums have stagnated or fallen because there is so much capital. Insurers and particularly insurance brokers have had to go in for cost cutting too.
Pressed by insurance brokers, insurance companies work on standard policies that aim to fit everyone and everything.
This is quite different from how it used to be, doing something bespoke, which suited the client. But because it is standardised, one policy can fit all manner of risks, so costs can fall. Because it is standardised it also means brokers have much less to do and have been deskilled.
Fees used to be 10% to 15% of premiums, but now they sometimes take just 3% to 5%. This is why brokers have turned to insurers to top up their income through commissions and payments for services to insurers.
Mactavish is a client adviser, one of those firms which help companies to know what their cover is, what the policy actually specifies and whether it would be valid when the client makes a claim. Sometimes it is not what the client hoped for.
In fact generally clients don’t get the cover they expect, but they think it is cheap, and they don’t think it will happen anyway. Insurers sell them standard policies but these do not always deliver certainty, but again most policies are never activated. Alternatively anything outside the norm may not meet the policy. Anything inside the norm may lead to litigation.
In an ideal world clients should demand better cover and insurers should respond by jacking up the premiums. Instead neither happens.
Mactavish’s CEO Bruce Hepburn is particularly vexed about cyberinsurance, where clients think they have cover but insurers with standard policies are not ensuring that the policies are fit for purpose.
Mactavish is proving to its clients that their policies may not cut the mustard, but the insurers are hard to budge although they do change under intense pressure.
The insurance solicitors are unable to drive these wording changes as they are conflicted too due to their relationships with insurers and brokers.
Hepburn has, however, driven change by working with QCs to deliver what he wanted. And the insurers and brokers do agree to the changes but it has to be demanded. It isn’t automatically offered.
It has the potential to be a car crash if a big cyberattack takes place and clients and insurers have a different opinion of what is or is not covered.
That has happened before, and some of those disputes are still not settled three years later. If it happens again it could bring the market to a halt. Far better surely for both sides to agree on what is in the policy, and let the client know much extra he will have to pay. That way he can take it or leave it, but at least he knows what he is getting. Currently he does not.