Insurance is provided by a variety of routes. The large, obvious branding on the paperwork might well not be the actual insurer. For example, Saga offers a range of insurances but Saga itself is not an insurance company. Acromas Insurance Company Limited (AICL) takes some of the insurance risk, but the majority is passed on to large insurance companies like Munich Re and Hannover Re.
Saga and the Automobile Association (AA) merged in 2007. The combined company focussed heavily on selling insurance products, but most of the risk of these products is passed on. Often when you buy insurance you are looking at the front of a long chain. Each box will want to make a profit, so each box needs to get paid. The longer the chain the more that is spent in administration and profit and the less there is to pay claims - as described in How Is Insurance Priced?
The Chain of Insurance
Each component in the chain brings value to the process, but insurance that passed through the entire chain has two problems:
The value of each party is outlined below. A good insurance broker can assess the components in a chain of insurance and provide advice on the value. As a buyer of insurance the most important question is to understand who the insurer is and to be comfortable with that company. The insurer is ultimately liable for paying claims.
Brokers looking to sell insurance look for people who are regarded as on top of things and organised in their local community. These people then listen out for others with insurance needs and suggest that they talk to the insurance broker. An introducer does nothing more than make an introduction, but for a broker they can be a very effective means of raising awareness and trust.
When you walk past an insurance broker on the high street that is a retail broker. A retail broker is an insurance broker with a direct connection to the buyers of insurance. Retail brokers are the people to understand the risks that the client faces, advise the client of the types of insurance to buy and help the client present the risk and complete the paperwork.
A wholesale broker is often called a placing broker. These businesses will almost certainly have an office address in the EC3 area of London, right next to the Lloyd's building. Insurance is still a personal business where much gets worked out in face to face meetings. A retail broker will use a wholesale broker to get a risk accepted by an insurer. The placing broker will still walk round all of the insurers and discuss the risk with them to obtain an offer for insurance.
Lloyd's brokers are a type of placing broker. The laws and regulations are complex, but in practical terms a broker needs to be a Lloyd's broker to enter the Lloyd's building and placing insurance with the syndicates. Each syndicate is best thought of as its own insurance company and Lloyd's itself is a marketplace - in a very traditional sense.
A Managing General Agent (MGA) is a business with specialist knowledge about some type of insurance. This can be anything from non-standard home insurance (eg homes in a flood area, houses build from non standard materials - ie not bricks, tiles, etc., and houses that are left unoccupied are all non-standard) to highly specialised engineering risks - for example wind turbines.
The MGA will provide the knowledge and skill to assess and price the risk and often a number of services that help to manage the loss of there is a claim. For example a leading MGA for wind turbines has a team of technicians who will got to a site and repair a damaged turbine.
An MGA does not hold the risk capital required to provide insurance. The need for risk capital is described in the Profit for Shareholders section of How is Insurance Priced?
The insurance company is perhaps the most important and least well know part of the whole chain.
The insurance is actually provided by the insurer. The insurer is the company that actually takes the risk of the insurance and has the legal responsibility to pay a claim. If your insurance claim is not paid satisfactorily your complaint is against the insurance company. The branding on your insurance documents might well be the broker or MGA, but the name of the insurer will be in the documents somewhere. A good insurance broker can help you find this and describe the insurance company to you.
The re-insurance companies absorb the catastrophic losses. An insurer might struggle to pay all of the claims when a whole town floods. A re-insurer takes the severe losses from an insurer in effect putting a limit on how much it can lose.
Re-insurance is important to someone buying insurance to the extent that a well re-insured company is financially stronger and more able to pay claims. However, generally a reinsurer has no liability to pay a claim to an insured - so the names and details of reinsurance arrangements are not that relevant to most buyers of insurance.
A good broker understands the reinsurance arrangement of the major insurance companies. Again, this knowledge will come into play when recommending one insurance policy over another. Good reinsurance provides strong support to your insurance company making it more able to pay claims in the worst situation. However, good reinsurance like all quality products costs more.
The whole chain of how insurance is sold, the risk analysed and absorbed is complex. This does have direct impact on the understanding between the buyer of insurance and the insurer that takes the risk. There are many potential links in the chain and each one comes at a cost - a cost which leaves less to pay claims. A good broker can help to navigate this chain and select the pieces that add value for the buyer.