Risks Of Buying A Broker

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Risks of Buying a broker
One chief risk of the acquisition of a broker is the effect this will have on both on the liquidity of the insurer and the lack of funds for other opportunities. Let us first look at the risks presented through the diminishing of capital reserves and the effect this will have on the liquidity of the business. Depending on the size of the broker being acquired there will be different strains on the insurer’s finances. A key concern would be to not let this effect the solvency of the insurer or to increase the risk of the insurer being unable to pay its liabilities. This is particularly pertinent as companies are in the process of trying to increase their solvency to fall in line with the EU Directive Solvency II.
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Solvency isn’t the only drawback of reduced capital funds. There is a certain opportunity cost associated with not having these funds available after purchasing the broker. For example, it may limit the option of the insurer to self-insure certain risks or increase retention levels of certain risks. This would effectively make the insurer more dependent on the reinsurance industry. A heavy reliance on re-insurance can be costly if changes in the market dictate a higher cost for transferring away risk. In situations such as these the option of retaining certain risks may be desirable but not prudent due to solvency worries. (bang in market cycle) Another potential down-side to diminished availability of funds is that it will limit other investment opportunities the insurer may wish to take later on. If a profitable market were to emerge the insurer may more hesitant to pursue these opportunities with reduced capital reserves. (Talk about loss of control from using broker to distributing clean)
There are numerous advantages to buying a broker rather than simply using a third party broker. These advantages are starting to be regarded as the ‘up-side’ of risk. Although the acquisition of a broker brings risks as described above there are many positives which could make this a worthwhile venture. Through owning a broker the insurer can exert a greater level of control over the distribution of their products. In doing so they can implement their corporate
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