Insurance Comparison – UK vs USA

Whether you work in a small, independent broking firm or the UK operation of a large, multinational insurer, it is likely that you are primarily exposed to ‘local’, UK insurance issues and problems. As a consequence, it is easy to become a little insular, forgetting that insurance in this country might actually be fairly straightforward and that lessons can be learnt from elsewhere.

Having recently returned from California, it is interesting to contrast the UK’s insurance structure and challenges with those in the USA – and recognize that we may not be so badly off.

Take regulation for example. While it is tempting to knock the FSA and criticise the growing influence of Brussels, perhaps we should be thankful that we are not grappling with the patchwork of laws and regulations, both federal and state, that our peers across the Atlantic face on a daily basis.

As brokers, we do not have to go through the tedious ritual of offering a risk to ‘admitted’ insurers (those formally licensed by the relevant state insurance commissioner) before obtaining cover with a more suitable, non-admitted, ‘surplus line’ insurer – who we knew all along would be more receptive to the exposure. We might have to contend with a certain amount of bureaucracy in the UK, but at least we don’t have to file an “affidavit of diligent search” with the regulator when we place certain risks.

As insurers, we are not prevented from distributing our products simply because we are unable to offer full perils cover. This happened, for example, in California after the 1994 Northridge earthquake. Not surprisingly, insurers were unable to offer earthquake cover in the aftermath of the disaster, but under the state’s ‘Mandatory Offer Law’ they were compelled to stop writing homeowner’s insurance altogether as a result. That particular piece of legislation was eventually modified some years later.

If we need any incentive to ensure that a competitive market for flood insurance continues to exist in the UK after the Statement of Principals expires in 2013, take a look at the US experience. American insurers have been unable to provide flood insurance for homeowners for decades due to their inability to spread the risk over a wide enough population to absorb the potential catastrophic nature of the hazard.

In response, the federal government was forced to create the National Flood Insurance Program (sic) way back in 1968. Over 40 years later misconceptions and confusion still exist. Apparently a third of US households still hold the false belief that flood damage is covered by their standard homeowner’s policy; and half of mortgage borrowers in low flood risk zones mistakenly think they cannot buy flood insurance.

Finally, we have Pool Re. Where else could we so easily access terrorism cover for commercial property that includes the risks of chemical, biological, radiological and nuclear force or contamination (CBRN)? The equivalent of Pool Re in the USA is TRIA (the Terrorism Risk Insurance Program Reauthorization Act) but this federal government backstop does not cover CBRN damage resulting from acts of terrorism.

Perhaps it’s not so bad in the UK after all!

 Graham Salmon is Managing Director of Realty Insurances Limited, a Chartered Insurance Broker.

December 6, 2011
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