A year and a half on from the height of the financial crisis, insurer security remains a top priority for corporate buyers.
While the insurance industry escaped the banking crisis relatively unscathed, the financial crisis has had a lasting impact on buying behaviour, according to a survey by AIRMIC (The Association of Risk and Insurance Managers).
Fears of insurer failure are no longer keeping members awake at night, but buyers are continuing to scrutinise their insurance counterparties, says AIRMIC chief executive John Hurrell. “They’re actively intervening to ensure that their practices are a little bit more robust on insurer selection than perhaps they had been a couple of years earlier.”
AIRMIC members are also buying from a greater number of insurers, notes Hurrell. “If you turn the clocks back three or four years, a lot of buyers were consolidating behind two or three key insurers and having a very significant position with those two or three insurers, whereas now there is a lot more spreading of the risk.”
This is a factor which plays to the strengths of subscription markets such as Lloyd’s. “Lloyd’s joined our partnership at the end of last year and part of that was in response to members saying that this is an important market to them.”
More due diligence
81 buyers, with a total annual spend of around £1.2bn took part in the survey, which was completed in December.
It found that while credit ratings continue to be used as an important indicator of insurer strength, corporate buyers are increasingly utilising other means of assessment.
Over a third of buyers said external ratings were their top source of information on insurer security. However, twenty-eight percent use brokers and other third party sources as their top source and 23% rely on their own evaluation.
Hurrell believes more buyers are conducting their own analysis than would have been the case two years ago. “We did an Academy course in AIRMIC last year on how to do your own evaluation on insurers’ ratings and what sorts of things members ought to look for and what resources they need to have.
“They’re still relying on all the things they used to rely on but they are adding their own due diligence to the mix.”
Relationships are still an important part of the business, according to the survey. Seventy-one percent picked long-standing relationships as the second or third most important reason for doing business with an insurer. “If you’ve been with an insurer for a long time that still counts for a lot,” says Hurrell.
Paying for quality
Interestingly, while counterparty strength dictates how much business a corporate buyer is likely to place with an insurer, it has little bearing on price.
A third said ratings affected the volume of business placed with an insurer 91-100% of the time. However, only 4% said ratings affected the price of business placed with them 91-100% of the time.
This is because buyers are not prepared to enter into price negotiation based on security, which they are taking as a given, thinks Hurrell. “For our members, acceptable credit ratings are a table stake – it’s a ticket to the dance – if you’ve got the right credit rating then you’re in the game.”
AIRMIC plans to poll members on insurer security again towards the end of the year. As the UK emerges from recession and the financial crisis becomes a more distant memory, Hurrell expects buyers to revert to more traditional selection criterion.
“When you see a road accident you drive very carefully for the next 25 miles and then you return to normal behaviour. Memories are very short and if we have another year where there are literally no problems or any challenges about insurer security in the marketplace, I think particularly the self-assessment due diligence will be cut back and people will rely again on rating agencies and broker recommendations.”
