The FCA’s recent Regulation Roundup newsletter set out the obligation on insurance brokers to carry out adequate due diligence on insurers, the aim of which is to prevent risk to customers in the event that an insurer fails and is unable to pay claims.

The FCA expects insurance brokers to demonstrate that they have carefully considered the insurers with whom they place their customers’ business. The FCA has given guidance as to what brokers should consider as part of their due diligence:

  • Insurers’ Solvency and Financial Condition Report, to review the solvency coverage percentage;
  • FCA and Financial Ombudsman Service (FOS) complaints data, to give an indication as to how an insurer treats its customers;
  • Audited accounts;
  • BIBA’s Litmus Test, an online facility which is free for BIBA members to use, which provides some financial analysis of unrated insurers and a comparison of financial ratios against the wider insurance market;
  • FCA Register, to see whether an insurer has passported in on a branch or services basis. UK firms and firms passporting in on a branch basis are automatically covered by FOS; firms passporting on a services basis can elect to come under the voluntary jurisdiction of the FOS. Brokers should check whether an insurer is covered by FOS. If it is not, the broker is expected to check whether there is a dispute resolution scheme in the home state, and whether UK customers are covered by that scheme.

Brokers are expected to give clear details as to the identity of the insurer in the literature they provide to their customers, importantly the insurer itself rather than the Managing General Agent behind it. It is key that customers have the information available to them to make informed decisions as to where their insurance is being placed.

The FCA intends to do further work to verify that insurance brokers are carrying out appropriate due diligence on the insurers with whom they place their customers’ business.