Don’t Blame it on the Broker. - 2006-07-07
Having spent nearly 40 years in the London Market, working across the spectrum of insurance and reinsurance, both on a Lloyds Syndicate and for Companies as well as a Broker and Consultant, I have been privileged to witness a vast number of changes, some good, some bad, but one thing never seems to change:-
Blame it on the Broker
It’s almost like the famous Jackson Five song, “Don’t blame it on the boogie” but in this case it’s
Don’t blame it on the Management,
Don’t blame it on the Accounts,
Don’t blame it on the low rates
BLAME IT ON THE BROKER.
When I first started in this market as a lowly junior for E W Payne, credit control was rarely an issue. I remember very clearly being told on my first day “the most important thing you must remember is that this market works on “Utmost good faith”, remember that and you will never go wrong”.
There were no PCs and everything was kept manually but this never caused a problem, at least not as far as the collection of premiums, claims and fees were concerned. Collection notes, often hand written on a scrap of paper, were handed to the Broker as he (and it was a “he” in those days) went about his daily business. At the end of the day the Broker would give the collection note(s) to a technician who would prepare a claims / premium document which would then be taken back into the market by the Broker or sent out by post or telex if overseas.
Once the collection was agreed it was merely, for the most part, a matter of offset. If any monies were owing payment would have been on a monthly basis. Of course, the Broker would hold on to the money for a while, since investment income would help pay for the, often large, workforce necessary to provide the service. However, long delays in paying claims were the exception rather than the rule.
Of course some companies and syndicates did get into financial trouble but these were few and far between. When a Lloyds syndicate hit hard times Lloyds ensured that the famous statement “Lloyds always pays” held true.
And then along came the Eighties. There had always been bad years, with large cat losses, there had even been a number of nasty product losses, Dalcon Shield, Agent Orange, DES, to name but a few, but nothing compared to what was ready to hit the market. Unforeseen Asbestos and Pollution claims suddenly emerged alongside huge cat losses. To compound the problems nearly all of this was coming out of the United States, a country infamous for its large court awards.
It was all too much for the London Insurance Market - 300 years of utmost good faith, and ease of payment went out of the window. Companies could no longer meet their obligations, Lloyds names found themselves facing bankruptcy, reinsurance recoveries failed as companies went into run off or faced liquidation. Still I heard “it’s the Broker’s fault, they placed the LMX business”, and “the Broker owes us x million dollars” etc.
The Broker did indeed find the security and place the risk but underwriters had the choice of whether to write the risk and accept the security.
Regardless of who was to blame, underwriters, Brokers or the courts, it is all water under the bridge and things had to change. Unfortunately, one area that seemed very slow to adapt was the accounts / credit control department. Terms of credit reduced and settlement was due to be made after 7 days. However, unless the money was collected by the Broker weekly settlement terms would not make any difference.
What was needed was for the market to recognise that when reinsurance was owed, it was no different than any other debt.
Can you imagine buying a car on credit, or borrowing money from a bank, and not paying for two, three or even four years and not being pursued for payment? Then, despite being financially secure, you offer half of the original loan, without interest and the bank or credit company agreeing - of course not! How long would a tradesman allow his account to remain unpaid before taking action?
The market is now entering more and more into e- trading which should bring about efficiency thus reducing costs and speeding up settlement. I recently met with Stephen Ulph of Aon who went into great depth to explain the benefits of e-trading and how Aon uses it to the benefit of its clients.
Previously Claims Brokers would trawl around the market often with dozens of files under their arms (some doing a very good impersonation of a pack horse) trying their best to see the market. There were so many files; broking had to be prioritised, often to the detriment of non current clients. This could lead to files not being shown, changes in reserves not reaching reinsurers, queries not being re-broked; in fact a very inefficient system. E-trading has changed all this, Brokers can sit in a nice comfortable office and send out literally hundreds of advices in the time it would take them to walk to Lloyds.
So why do we still have problems with reinsurance recoveries? Why, when I talk to clients do so many still – “Blame it on the Broker”?
It has to be remembered that the Broker is in business to make a profit. It is not disputed the Broker has a duty to its client, but the Broker is the intermediary and it’s the reinsured’s money, not the Broker’s.
With effective and strong credit control it should be possible to reduce delays in payment and bring stability to a company’s financial account. Subject of course to having reasonable security.
I can recall being asked to investigate two similar cases involving literally millions of dollars in uncollected recoveries, involving different Brokers but with the same outcome.
In both cases the London Market Company concerned continued to send out collection advices year after year without receiving a penny in payment. It wasn’t until the potential issue of time bar reared its head that anybody decided to take real action. Yes I accept that the reinsured had raised the subject with the Broker, even complained about non payment, but because of the importance of the relationship between the reinsured and the Broker and monies were being paid, albeit from different reinsurers, no real action was taken.
Following investigation it transpired that in both cases the reinsurers were overseas and in both cases all advices had been sent. Also, in both cases the Broker had chased payment but as the situation had become more of a problem, it received less attention. This is where we again hear, “the Broker is to blame”. But is it the Broker’s fault? After all, the claim advices had gone out, payment had been requested and the client knew payment was overdue. Surely cases like these should not occur if reasonable credit control procedures are followed?
The first case involved a New York intermediary which was our first port of call, and it transpired our last. Here we found the claims advices, hundreds of them, in shoe boxes in a stationery cupboard. This particular intermediary had been cutting costs by reducing outgoings on its claims area. It was a costly exercise, but we managed to get the claims out. Unfortunately by now the security was not as good as it could have been, so full payment was not achieved. If the reinsured had taken a serious interest early on in the proceedings circumstances could have been different.
The second case was a lot simpler; the overseas reinsurer denied ever being advised of the claims; this was despite evidence to the contrary. However, with help from the London Broker every file was copied and couriered out. Within a short time a discounted offer of commutation was received and accepted. Again, if the reinsured had recognised the debt at an early stage, it is possible that full payment would have been received without having to commute.
From both these examples it is easy to see why the market often so heavily criticises the Broker. But I believe this is unfair. The market needs to recognise that once a reinsurance request remains unpaid within a reasonable period without there being any coverage issues, steps should be taken to pursue payment. The Reinsurance Market must bring itself into line with the rest of commerce, set reasonable and realistic terms of credit and act on them. Above all it must accept responsibility for its own actions and stop passing the buck.
After all “It’s not the Broker’s fault - not always”.
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