There is no one right answer regarding which is the preferable approach between a single-insurer or multiple-insurer coverage placement. This article outlines various considerations so that an insured can evaluate their unique circumstances and priorities in order to make the best decision for their company.
At some point in their careers, insurance buyers may be faced with the decision of selecting one insurer to underwrite the entirety of a coverage line versus going with a program that involves multiple insurers in a layered and/or quota share placement. [1] There is no one right answer regarding which is the preferable approach. This article outlines various considerations so that an insured can evaluate their unique circumstances and sensitivities in order to make the best decision for their company.
1. Coverage Form Consistency
A major advantage to using a single insurer for a given line of coverage is consistency of coverage terms throughout the placement. With a layered or quota share placement, many of the participating insurers may insist on their own unique terms and conditions. This risk can be mitigated by requiring that all insurers utilize the same policy form. However, this is often not achievable given insurers’ treaty reinsurance constraints.
2. Claims Adjustment Process
There are several aspects to consider regarding claims adjustment. The first is coverage interpretation of the policy form. With a single-insurer placement, there is only one insurer to negotiate with regarding how coverage responds under the policy. Typically, carriers providing excess layers or additional quota share participation under a multi-insurer placement will adopt the interpretation of the lead insurer, but this is usually not a legal requirement.
Another consideration on property insurance is the determined cause of loss and property loss valuation. If multiple insurers are involved in the placement, it is advisable to get all insurers to agree, in advance of a loss, to use a common loss adjuster.
Additionally, with liability insurers, there are issues of defense counsel selection and settlement authority. With a single insurer offering high limits, the insurer has incentive to approve/select the very best defense counsel because they have more risk of an adverse outcome with the case. Likewise, there are fewer parties who must be involved in settlement negotiations with the plaintiff attorney. If multiple insurers are involved in a coverage program, it is important that good communications be established early in the claim resolution process.
3. Future Renewals
A single insurer who underwrites one-hundred percent of the risk exposure is often much harder to replace on a future renewal. This can have significance not only for dramatic situations such as a non-renewal by the insurer, but can also factor into renewal negotiation leverage. If a single insurer has a problem with a risk exposure and decides to reduce sublimits, raise deductibles or otherwise restrict coverage, there is little an insured can do other than attempt to replace the insurer on the full program. With a multi-insurer placement, an insured can, in conjunction with their broker, reduce the insurer’s participation in the program by having other insurers who do not share the concern increase their participation.
4. Limit Capacity
As for limit capacity, the advantage lies with a multiple-insurer placement. In many instances, an insured has no choice but to involve multiple insurers on a placement because no single insurer is willing or able to offer the full limit sought.
5. Insurer Continuity
Insurance buyers should seek to maintain long-term relationships with their insurers where possible. Change often involves hiccups. It takes time for an insurer to get to know your risks and for you to get to know the insurer. Long term relationships stand the best chance of obtaining service that matches your needs and expectations.
As noted with the previous consideration, a multiple-insurer placement may allow you to maintain a relationship with a lead insurer even when current needs outgrow the single insurer’s capabilities/comfort level. This may represent the best path to maintain their valuable loss control or other services.
6. Financial Integrity
Single insurer placements clearly concentrate counterparty risk. This is more pronounced on long-tail exposures such as general liability and environmental liability. It is important that prudent financial stability standards be adhered to on all insurance placements. However, this is even more the case with single insurer, large-limit placements.
A method of mitigating counterparty risk on layered placements is securing so-called “shaver” language on excess layers, however this is beyond the scope of this article.
Conclusion
There are advantages and disadvantages with both single-insurer and multi-insurer placements. If all else is equal (which rarely is the case), let your decision be guided by the factors outlined within this article and the unique weighting that you apply to each.
[1] "Layered" refers to multiple policies stacked vertically, each with a separate attachment and limit. Quota share (or subscription) refers to insurers' percentage participation at a given limit level, so as to create multiple horizontal slices. Coverage line placements can be both quota share and layered.