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Security for buyers may be a long way off.

Security for Buyers May Be a Long Way Off

One of the worst problems that brokers have to cope with is the security of insurers and reinsurers that they recommend to clients. The collapses of Mission, Integrity and Ideal, combined with the development of latent disease and other long-tail exposures, the last soft market, and our increasingly litigious society, have left brokers with gigantic errors and omissions risks which are among the most difficult risks they have to place.

The current situation between London United Investments and its London underwriting agency, H.S. Weavers, whose lead underwriter, Walbrook Insurance Company, was the subject of a letter from Alexander & Alexander which cast doubt on its financial strength brings to the fore a hoary question. Are brokers--or anyone else for that matter--competent to assess the security they recommend to their customer? Then there is the corollary question of how brokers should handle the professional indemnity risk they run when they are accused of not being competent to assess security.

The question is up for debate. As for Walbrook, Weavers and London United, it looks so far that Tillinghast's actuarial review of Walbrook's loss reserves may calm fears. Yet what has become apparent from this affair is that not even the largest brokers seem confident of their ability to assess security; partly because they come to different conclusions and, as in the case of A&A, even opposing conclusions from their own subsidiary broking companies. (Alexander Howden in the United Kindom has continued to support Weavers enthusiastically).

A&A stated in the aforementioned letter, "We are unable to determine Walbrook's potential to fully meet its future obligations to policy-holders." Recently in the United Kingdom, Julianne Jessup of market analysts Barclays de Zoete Wedd said the decision of London United to waive a 1988 final dividend to reserve for U.S. casualty claims could have major implications for Lloyd's brokers. If London United ceased paying claims, the London brokers which have been placing U.S. business with Weavers would be wide open to litigation from U.S. clients.

But what about the poor clients? If they go to a major broker, they are given one security assessment. If they go to another broker, they are given an opposite opinion. If they go to A&A and then to Howden in London, they will get an opposing view from the same broking group!

All the major broking houses say their security betting systems are highly sophisticated. What does that mean when diametrically opposed views are given on the security status of the same insurer?

Security is one area that major brokers would do well to pool their skills and efforts and present a unified front--in the interests of their own credibility of obtaining more reliable information for their clients, and most importantly, of not misrepresenting their markets. The way the major brokers have responded to the Walbrook case leads clients to lose confidence in security assessments and to doubt their broker's advice in other areas.

Security assessment is not easy, of course. I was recently told by an insurance accounting expert that, because loss reserving is a very inexact science, there will always be a range into which loss reserves must fit. He explained that an auditor would find an acceptable range from 10 percent below the eventual payments to 10 percent above. I was surprised at the degree to which this could affect an insurer's results. He responded by saying that an auditor's recommended figure for long-tail reserves within 10 percent of the run off would set a precedent! It certainly makes you wonder whether accurate security assessment is even theoretically possible.

Chris F. Best is the editor of Foresight, a London-based risk management and insurance journal published by Risk and Insurance Group Limited.
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Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Title Annotation:insurance brokers
Author:Best, Chris F.
Publication:Risk Management
Article Type:column
Date:Jul 1, 1989
Words:630
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