We would like to respond to your editorial titled “Regulators, leave subscription policies alone,” dated Dec. 7, 2020.
It is true that these are turbulent times in the insurance market, and that insurers have been experiencing losses from fires, natural disasters, and Covid-19, as well as lower interest rates. It is also true that capacity is limited, but we would submit that the inclusion of a Best Terms Clause has no impact on any of these issues that cannot be addressed through the usual process of underwriting.
The Best Terms Clause is a factor in this hard market, in which insurers are skittish to sign on to a risk and/or limit their participation on certain risks. In a competitive marketplace, more insurers are willing to sign on to a risk at a given price than there are layers to fill.
While outsiders may not understand the details of a subscription policy, that does not necessarily invalidate their opinions that the process, by current business practice, is patently unfair. The practice of Best Terms has raised the ire of regulators and risk managers, and has been noticed by the media, because it so markedly departs from a standard of fairness and transparency required by any other industry that its justification is incomprehensible.
The true importance for writing this response was a question raised in the editorial that speaks to the insurers’ justification for Best Terms. Namely, “Why are my competitors charging three and four times more for the same amount of coverage when I am the lead insurer doing all of the claims and administration work on the policy?”
The simple answer to this dubious reasoning is this: You said you would in your quote for the business. Had all the other carriers charged the same rate or less than the lead carrier, then the lead carrier would have been satisfied. That has nothing to do with capacity or losses or interest rates, it’s simply sour grapes and greed.
While insurance is important part of the global economy, which no risk manager would deny, the industry continues to display behaviour that appears unethical and borders on anti-competitive. The Best Terms Clause appears largely to be a Canadian phenomenon. RIMS has been investigating this issue and discussing it with their contacts in insurance regulation. BCRIMA will also be providing input to the regulator regarding the practice on behalf of our membership and other commercial insurance consumers.
There will always be subscription policies and that is not the issue. The issue arises where a lead underwriter could low-ball a quote to the broker and then rely on other underwriters, or even collude with other underwriters, to raise the rates on other portions of the risk. With the ability to alter a price that is tied to the pricing of other competitive parties, how else can this practice be interpreted?