G&A broker PI series – The 7 Deadly Sins
Deadly Sins 5 & 6: Resource failure and market selection
Helping you identify similar risks to your business and avoid the same pitfalls, the Griffiths and Armour team have developed a claims and risk management series entitled ‘Broker PI – The 7 Deadly Sins’.
Deadly Sin 5 – Not resourcing the business properly
This is a general problem that impacts brokers of all shapes and sizes and is not an issue particular to more commoditised classes. The fundamental question that underpins this sin is – are our broking firms resourced sufficiently in all areas to ensure we fulfil our duties as professional advisers? This is a bar which is much higher for brokers then people often assume.
The risks can be partly mitigated, with robust systems and clear processes, but when it comes to negligence claims against brokers human error is invariably the root cause. The following areas are where we most frequently see the problem arising:
1) Staff time and resources – whether this is on renewals, new enquiries, mid-term changes or even book transfers. Do our staff spend enough time in providing advice and securing the detail required to ensure policies meet their clients’ demands and needs? Some of the biggest claims against brokers we have seen are where either mid-term changes have not been fully actioned, quotes and policy documents not sufficiently checked, or relevant cover warranties or gaps communicated to clients.
2) Training and Support – the insurance landscape is complex and changing more quickly than ever with new products, changing client needs and IT/technology developments that all require staff to continue learning and evolving their roles. Where there is an insufficient amount of training, practice and support then errors are often commonplace.
3) Supervision and auditing – a factor which can exacerbate errors and omissions. Insufficient rigor in our checking, supervision and audit procedures, which are often carried out by the most time-pressured individuals, can lead to simply errors manifesting in negligence claims. Although more important in complex areas, the compounding of errors by a failure to identify and correct can easily occur with any insurance product and at any level of client.
What often makes mitigation more difficult is that the root-problems can often be sporadic, such as busy renewal periods, holiday seasons or other times of stress for any staff member. One of the biggest claims we have seen arose from a book transfer where the firm’s staff did not have time to review policy covers to ensure appropriate in a reasonable time-frame.
The same can easily happen when market conditions harden, which several classes such as PI are currently experiencing. Renewal processes can become more cumbersome and time-consuming, and with greater pressures in minimising premium increases, focus on important coverage matters can be diminished.
Although the mitigation measures are wide-ranging this should be a continual priority area for firms as, if resource problems are not highlighted and managed quickly, the downsides can be severe and very costly to brokers.
Deadly Sin 6 – Market Selection
The question of appropriate market selection is perennial, and something on which every broker in the land will have their own views, based on past experiences and their insurer relationships. While it is certainly not our position to tell firms to change their placement strategies, we are able to provide some insight into the market strategies that are more frequently implicated in negligence claims.
There has been a deluge of insurance articles over the last five years on the use of un-rated (or weakly capitalised) markets and, although this has been one of the leading causes of claims, my focus here is on some of the less obvious, but equally problematic, areas:
- Distribution channels – the number of distribution options has increased markedly over the last 15 years and the chains in the process often longer and more complex. Wholesale brokers, MGAs, online platforms or other agencies can, and be, and often are, involved in various combinations. Whereas this is not a problem itself, it can create layers of opaqueness to the distribution process. If it is unclear who the underlying risk carrier is, how can a broker possibly determine whether that solution is appropriate for their client? With more links in any given chain, a further danger is that this gives greater opportunity for errors or failures in communication. This is rather important in an industry where full material disclosure is key.
- New markets – another theme of recent times is the sheer number of new participants in various markets, whether driven by international consolidation, new inflows of new capital or insurers with expanding appetite. This is an essential and positive dynamic to maintain a competitive marketplace, but with untested providers with little track record, our due diligence processes need to be enhanced to ensure that they will match or enhance the existing offerings in sustainability and claims performance.
- Switching markets – frequently moving the insurers our clients’ covers are placed with, whether due to them ceasing to write that business line, or simply to reduce premiums, can result in a dangerous race to the bottom. Although price is an important factor for most insurance purchasers, it does not necessarily align with value, and if price is sought to the disregard of cover security and insurer quality then dangers will invariably lurk. The other even more important aspect is that each time cover is moved from one insurer to the next, there is an inherent danger of insured losses not being indemnified due to different conditions or exclusions being applied, levels of cover changing or matters simply falling between the two stools. This is a further area where we frequently see six figure claims against brokers.
With significant downsides to getting it wrong, the selection of the right insurer partners that match your clients’ requirements is of vital importance. But, in addition to this, the careful management of your clients’ policies and their renewals across your chosen carriers requires due skill, care and attention to avoid the minefields that exist.
Our members have exclusive access to our Compass PI Scheme. As part of this, you can gain advice from Griffiths & Armour on mitigating these risks, as well as timely support if such an issue does arise. To find out more about the Compass PI scheme and how it can make an impact on your business, speak to your BDM.