After the Spitzer inquiry, transparency has been touted as key to restoring insurance industry integrity but brokers and insurers have very different ideas about what this actually means and how this will impact on their business. Guy Anker reports
Just over a year ago, New York Attorney General Eliot Spitzer stunned the insurance world when he began a crusade against several brokers and insurers with accusations of colluding to ensure bid-rigging and illegal inducements in the market.
Since that fateful day in mid-October last year, the term 'transparency' has become the buzz-word of the insurance industry as companies seek to show buyers and regulators where, and to whom, their money is going. However, it could be argued that repeated calls for - and protestations of - improved transparency are running the risk of rendering the term meaningless, through overuse and lack of specifics.
The main thrust of change has been to ensure adequate disclosure of contingent commissions, where they still exist. Smart and Cook chief executive Paul Meehan spoke out on the issue of transparency at September's UK Insurance and Financial Services conference. He highlighted that contingent commissions come in a variety of forms and that they should be allowed to stay but not everyone in the broking market agrees.
Speaking about profit share arrangements and volume overriders specifically (see box), Mr Meehan claimed that these are valid and regional brokers have no need to end such practices. He also pointed out that buyers have long been able to require brokers to disclose their earnings from insurers, where brokers have been regulated under the terms of the Insurance Brokers (Registration) Act, but that, in reality, they rarely ask.
Mr Meehan insisted the problems in the US broking market are unlikely to be replicated in the UK, adding that the situation there had arisen due to a lack of competition in both the insurer and broker spaces. "It could not happen here because the UK is very competitive," Mr Meehan said.
"If there was bid-rigging we would soon know and use it against any broker involved." (PM, 29 September, p8)
However, while the UK has so far been spared any Spitzer-style investigation, the implications of the upheaval across the Atlantic have found their way, inevitably, to these shores. Earlier this month, broker Aon announced it is to slash 750 UK jobs, partly to make up for a shortfall in income after the abolition of contingent commissions. Marsh, which came under the most immediate and deepest scrutiny from Mr Spitzer - having to pay $850m (£481m) compensation as a result - has been worst hit on the job front. To date, it has lost 5500 people worldwide, with more than 1000 jobs having gone in the UK.
Despite Marsh's problems, it has been vocal in trying to alter the broking landscape and calling for enhanced transparency, much to the annoyance of its peers. Marsh has been urging brokers to end the practice of accepting contingent commissions, advice rival JLT has not taken on board in certain circumstances where it is competing against regional brokers that still take such revenue. The sensitivity of this matter was shown most recently at the UK Insurance and Financial Services conference, when Marsh UK retail chief executive Toby Foster found himself at the centre of a row over his firm's stance.
Mr Foster told the audience of Marsh's view on commissions and the need for transparency. That prompted one delegate, Paul Dickson of Dickson Insurance Brokers, to question whether the broker should be lecturing its peers, given that it was at the centre of the scandal in the US - a dispute that has produced many column inches of discussion on Post Magazine's letters page in recent weeks (PM, 13 October, p12 and 20 October, p14).
While there are clearly differences of opinion in the market about what transparency actually means or requires, many regional brokers agree with Mr Meehan's assertion that intermediaries should continue receiving remuneration in the current format.
"I am with Paul on this," says Grant Ellis, chief executive of the Broker Network. "There is all this talk about transparency being the only way forward but there is a difference of opinion between the London market and the big intermediaries versus regional brokers. Regionals have been dragged into it when there is a huge difference in practice between the different types of brokers."
Stuart Reid, chief executive of broker Stuart Alexander, also agrees that regionals should not be lumped in the same basket as global brokers: "Whether we receive 30% commission, or whatever, the price to the punter is the same," he says. "We have higher commissions than some brokers because we take on work for the insurer."
Not everyone agrees, however. Nigel Barton, chief executive of intermediary Oxygen, claims brokers should not be accepting profit commission. He believes intermediaries too often mix up broking and agency operations when accepting revenue.
"We don't believe a broker should be taking profit commission and additional commissions," he argues. "We think there is a difference in acting as an agent and a broker. When you are an agent you need to explain this to the end-client, that on this basis you are offering an insurer's capacity so you can take profit commission. These are two distinct activities, yet some broking houses mix both. To manage expectations and to not have suspicion you need to be clear on what your principle is."
Oxygen feels so strongly about commission that it has reserved a page on its website outlining its position for potential customers to view.
Mr Barton acknowledges Oxygen is in a more privileged position than some of its competitors, given it only launched a year ago and so has been able to start with a clean slate as opposed to being bogged down by legacy practices.
He says: "We are new so we are able to set out our position. There has been greater impetus to change things because of problems in the US but there is less impetus for regionals in the UK because they have not got the long arm of the law behind them. We don't have the same problems as in the US but there is still a lack of clarity in the UK and I am not sure customers understand the roles and responsibilities of the insurance market. Once it is explained they will be fine."
Whatever changes the experts are asking for, one common theme is that it should be up to the market to put those in place, rather than the regulator.
The good news for brokers is that the Financial Services Authority has reiterated its past statements made on the subject, that commissions and inducement are still permissible provided they do not lead to a conflict of interest.
The FSA also says any future changes to the legislation would have to be taken by the Treasury, rather than itself as regulator. As things stand, the UK government has not made any suggestions that the legislative landscape will change to outlaw such controversial remuneration.
However, there are precedents overseas for this. According to the European Federation of Insurance Intermediaries, also known as BIPAR, the government in Denmark is preparing legislation to outlaw remuneration from insurers, meaning income can only be generated from clients. Such a regime was actually implemented in Finland in September.
The BIPAR has written to the various governments to protest, as it feels the market should be able to manage itself. While such draconian action is still a long way off in the UK, those examples show just how seriously some jurisdictions take the issue of broker remuneration.
Brokers in the UK are firmly against any such state intervention. Eric Galbraith, chief executive of the British Insurance Brokers' Association, insists: "I would not agree with the principle that it is illegal in some countries for insurers to pay commission. What is happening in other countries is a very interesting twist but it's not a free market in those cases."
Biba has moved quickly to support colleagues abroad via the BIPAR, and Mr Galbraith adds: "We have rules and the market is changing and responding. I don't want further changes and I hope the FSA will see that the market has responded. It is early days under statutory regulation and people need to get this right first before there are any drastic changes."
Andrew Paddick, director-general of the Institute of Insurance Brokers, also believes such regulation in other countries goes too far. "We don't have problems in the UK that cause problems for clients," he insists.
"The only troubles come where some insurers have minimum requirements in a year, and if a broker has not given them enough business they may place business where it would be better for the customer to do it somewhere else."
Mr Paddick adds that brokers in the UK have nothing to fear from the FSA, so long as their practices are transparent: "The FSA has said 'get your house in order' and that has happened. I don't think the regulator is there to force how the market is paid - commission has been with us for a long time."
He cautions that more can be done: "Regulation is not getting rid of some of the bad practices like insurance money rules - and I deliberately don't use the phrase client money rules. There is mixing of client and risk transfer money and there are abuses there. There are also concerns with offshore underwriters."
While brokers have strong views on what should happen in the future, so do buyers. David Gamble, executive director of the Association of Insurance and Risk Managers, is in favour of a system where commission from insurers is banned. He says: "We remain of the view that the most transparent system of all would be one where brokers were remunerated only by the buyers of insurance. An important development during the past year is that we have established with the FSA that full disclosure is a right and cannot be negotiated away. We urge our members to insist upon transparency whenever purchasing insurance through a broker."
It would appear, however, that if Mr Meehan's conversations with eight others brokers - which found only one had recently been asked by a corporate client to disclose insurer earnings - are representative of the wider market, insurance buyers are not heeding Mr Gamble's call.
Airmic published a members' survey in June that found the market had become significantly more transparent but that there was still a long way to go. It will learn whether there has been any further progress when it conducts another survey by the end of the year.
"Until then, there's very little we can add to our previous statements on the subject," says Mr Gamble.
Yet Airmic's views draw suspicion from some in the broking sector. Mr Reid says buyers only have to ask and he will disclose where their money is going.
A stronger opinion is that of Mr Ellis, who concludes: "It's rich of Airmic to say that it wants transparency when every one of its members knows it has always had the right to know how much that broker is earning if it asks. It is trying to deflect criticism from its members for not latching onto contingent commissions earlier."
DIFFERENT WAYS BROKERS EARN MONEY
- Their fee as a percentage of the premium paid by the customer
- Profit sharing - paid by an insurer when a broker exceeds a profit target agreed between the two
- Volume over-riders - paid by an insurer when a broker exceeds an agreed amount of business generated
- Interest from monies held either in risk transfer or in a non-risk transfer account
- Monies earned via a favourable exchange rate.
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