Andrew Chilton gives a broker's view of London's run-off market, stressing the need for a positive and professional attitude.
For too many years, most brokers have struggled to address the issue of how best to handle run-off business, with a substantial variety of methods producing varying degrees of success. Strategies range from establishing large operating divisions or subsidiary companies to putting everything into cardboard boxes in cupboards and hoping that it will go away. Consequently, the quality of the service provided to clients and markets has been equally variable.
Much depends on the underlying attitude that the broker takes with regard to servicing the business, now in run-off, that it placed on behalf of its client. “It is something that I want to do; it is something I should do; it is something I have to do; it is something that I will deal with between renewal seasons; it is something I will deal with if anyone raises questions”. Whichever of these statements is most applicable will determine the potential effectiveness with which a broker manages its run-off business.
The Insurance Brokers Registration Council published a code of conduct which states, among other things, that: “Insurance brokers shall at all times conduct business with utmost good faith and integrity” and “Insurance brokers shall do everything possible to satisfy the requirements of clients and shall... place the interests of clients before all other considerations. Subject to these requirements and interests, insurance brokers shall have proper regard for others.”In these days of ever increasing regulation and compliance, it is well to keep our duties to clients in the forefront of our minds but how far back does that duty extend -15 years, 20 years, 40 years, 50 years or longer? Does it ever expire? It might be technically correct to assume that there is an obligation to provide an on-going service for the business placed on behalf of a client. However, is it reasonable of that client to expect the broker to provide the same level of service, at year 2000 costs, that they would have expected, say, in 1959 when the account in question may have been placed?
Some take the view that the broker was paid for the work (in 1959) and the client should not be penalised if the broker did not make adequate provision to set aside income for future servicing costs. However, this does not take account of the fact that the insurance world today is very different from that which existed 40 or more years ago.
In the past 30 years, we have seen a proliferation of mergers, de-mergers, management buy-outs, rationalisations, re-engineerings, centralisations, de-centralisations and liquidations, to such an extent that it may not be possible to locate the original broker anyway. The organisation that currently holds a cardboard box with certain files in it undoubtedly has a responsibility for the business contained in that box. It acquired that when it obtained the rest of the business and its assets. However, it takes a very long stretch of the imagination to say, and believe, that it has been “paid” for the seemingly limitless and on-going servicing costs associated with the run-off of that business.
While some market participants may have little sympathy for the broker in this situation, it is in no-one's best interests for any account to be handled inefficiently or even perhaps unprofessionally. Equally, there should be some incentive or reward for good practice. Perhaps this is the time to reconsider the resurrection, (not the creation, as they have existed before), of fees for the collection or resolution of run-off claims and associated issues, payable by the recipient of any funds generated. Members of our industry frequently extol the virtues of payment by results. Surely, the management of run-off business is an area which is ripe for such a philosophy to be more widely practised. It is hardly in the long term interests of clients, liquidators, underwriters and brokers to allow run-off accounts to wallow in a mire of inactivity.
The success of any new venture must depend on its ability to generate new income and retain and develop existing business, at the same time controlling and containing its operating costs at realistic and acceptable levels. In this context, the existence of a significant amount of run-off business for clients no longer producing new income could represent a very real millstone around the broker's neck that ultimately may drag the organisation down. However, it cannot be ignored. Failure of the broker to act professionally on behalf of its client, prejudicing its position with its insurers or reinsurers, may result in substantial errors and omissions settlements. Whether brokers are successful in generating income from the servicing of this business or not, it remains with us and must be addressed.
As those who have been dealing with North American business over the past 20 years will be only too well aware, we are living in a radically different and litigious society to that of 30 years ago. Not doing something or doing something badly is unlikely to be written off to experience, as may have once been the case. “Someone is liable and should be held liable” is a tenet that is increasingly voiced. Brokers, in particular, should be aware of the vulnerability of their situation as their clients' representative in the market.
What choice does a broker have? Basically, there are just two options. It can seek to get rid of the problem by passing it over (at a cost) to one of the organisations offering specialised services in managing the run-off of broker accounts or it can seek to handle it itself in a professional but cost effective way. Such circumstances may well provide an opportunity to review and improve the way that live, as well as run-off business, is handled which, in turn, may provide an extra competitive edge to gain and retain new business.
The “do-it-yourself” option should not be taken lightly in view of the significant associated staffing and operational issues. The servicing of an account in run-off almost entirely revolves around advising, agreeing and collecting claims and/or negotiating the resolution of outstanding liabilities by way of commutation or some similar financial arrangement. This presents the conscientious broker with an additional problem - has it sufficient staff with the right skills, knowledge and ability to handle this business?
Some people may vociferously disagree but, for a long time, the claims department in a broker's office was not seen as the place for a glamorous career. A claim does not generate any brokerage income and is regarded as bad news, both by the client who has suffered the loss and by the underwriter who is being called upon to indemnify its client. Nobody likes to get bad news and it is the broker's claims department that has the often-unenviable task of being the conduit for this. However, the (re)insured is the client of both the broker and the underwriter. Both have a responsibility to ensure that their client receives the appropriate consideration and service for which it has paid.
In the past, it may have been adequate for the broker to act as a postal service, delivering messages to and from its client and the market. In today's world of electronic data storage and communication, such tasks, with very few exceptions, do not need manual intervention. The broker's role in the future scheme of things is likely to be limited and vulnerable unless it ensures that its staff are adequately trained and competent to deal with the problems and issues raised in the resolution of its client's business.
The nature of claims has become more complex, both in terms of the coverage provided and the legal ramifications of apportioning liability. Nowhere is this demonstrated more clearly than by an account that is in run-off. Almost invariably, this involves the resolution of liability claims for situations that could not have been foreseen at the time the risks placed were placed, applying current attitudes and value judgements to events that occurred a long time ago. It is imperative that the broker, if it is going to be successful in managing its run-off business, has the right balance of skills, knowledge and experience available. This may require a greater investment in training and education. Those not prepared to make this commitment will benefit from leaving run-off management to the professionals.
Some organisations have already acknowledged the importance of claims services in obtaining new business, involving claims specialists at the time business is being placed in the belief that it is better to try and identify problems before they arise rather than to start looking for solutions after the event. If such knowledge and skill are recognisable assets in obtaining new business, should they not also be put to profitable use in managing the “millstones” that are acquired as years go by?
Finally, it is a mistake to assume that run-off only concerns the past and that the problems currently facing us are transitory and finite. In the 1950s and 1960s, our industry clearly did not appreciate the issues associated with asbestos and pollution and the attitudes that the courts would take. If they had, the situations created in the 1980s and 1990s would have been controlled or avoided to a much greater extent. Do we know the problems which are being created today that will materialise in 10, 20 or 30 years? Are we any better at seeing into the future than our predecessors? What we do today will provide the foundations for the way our industry develops in the 21st century. The successful brokers of the future will be the ones who invest in their ability to recognise and take the opportunities that arise.
Andrew Chilton is a reinsurance consultant, A.C.E.T. Consulting.