September 5, 2013 by Canadian Underwriter
A.M. Best Co. released Wednesday a briefing on whole account broker deals in Britain, suggesting such deals could present a risk of non-disclosure and lower margins but they also have the potential to reduce the cost of acquiring new business and to let insurance carriers diversify risks.
In its Best Briefing, titled London Market Placement Deals Represent New Stage of Evolution, the Oldwick, N.J. ratings firm stated that new developments in broker deals “represent a key departure from current approaches, not least in terms of scale.”
For example, last March, Aon Risk Solutions signed a coinsurance agreement with Berkshire Hathaway International Insurance Ltd., for all of its Lloyd’s business. Under the terms of that agreement, Aon’s managing general agent business will have delegated authority to grant cover on behalf of Berkshire Hathaway.
Meanwhile, A.M. Best noted, Willis Group Inc. has said that relationships with carriers under its “Willis 360” concept will provide enhanced cover, increased limits and integrated risk management services.
“For insurers that are involved in the new contracts, A.M. Best would become concerned if they lose underwriting control,” A.M. Best stated, adding the risk of non-disclosure “may be heightened” under the new arrangements, compared with per risk placements.
“Significant discussion among insurers can currently arise when brokers are dealing with a single risk,” according to the report. “However, if risks are pooled into a portfolio, some disclosures may not be made, and the debate is likely to grow over what is deemed to be ‘material’ disclosure.”
A.M. Best warned insurers’ margins “may also be squeezed if brokers take some form of block commission on deals.”
But there could be some positive developments from whole account broker deals.
“Insurers that are part of the facilities may benefit from a reduction in acquisition costs,” A.M. Best noted. “Such partnerships with brokers can result in good business flow and provide risk diversification. Furthermore, insurers may welcome the assistance of broker management information, such as historical data on portfolios – provided the information can be verified.”
A.M. Best predicted that regulators “are likely to be watching developments closely, particularly the structure of commissions paid under the new contracts.”