Insurers spread risk, primarily through reinsurance, in order to take on greater risk through their insurance polices than they could retain on their own. Syndication and subscription policies are other means to share risk which reduces an insurer's exposure to any one loss. Lloyds of London has used subscription policies for years as a means of spreading risk.
The concept of syndication, or using a number of insurers to write a risk, also makes sense for insureds in our current economic environment. A recent article, entitled Syndication for Reducing the Risk of Carrier Capsize by Joshua Stein, Chief Underwriting Officer, IronHealth, points out that insureds should be considering syndication as a means of reducing carrier risk.
From the insured’s perspective, during this period of unprecedented upheaval in the financial sector, isn’t it reasonable to assume that virtually all insurers have exposure they either aren’t aware of or aren’t yet owning up to?... If the current crisis has taught us anything, it’s that apparently bullet-proof financials can morph into near insolvency virtually overnight.
Using multiple insurers on a placement can reduce the risk to the insured from insurer insolvency, but carrier risk is more than insolvency risk. A carrier can be solvent and strong, but can tighten up underwriting guidelines or decide to stop writing a class of business. For an impacted insured, this can make renewal a tougher and more expensive proposition. Having other insurers on a program and ready to step in is a good idea.
Insurers want more premium and tend to increase their risk tolerance in a soft insurance market, which leads to larger lines and less risk sharing. As the article suggests, insureds might want to consider increasing the number of insurers on their programs. Two ways to accomplish this are subscription policies, frequently used by Lloyds, and layered programs. While this can be more work for the broker, it can also reduce carrier risk.
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