Falling rates and rising commissions are putting pressure on commercial underwriters
Commercial rates are crashing as broker commissions reach unprecedented levels, driving a wave of change through the market.
As the soft market hits rock bottom the clamour for distribution has heated up. Brokers are in the fortunate position of being able to command higher commission rates, but there are deep concerns about what this means once the recovery sets in.
Warnings persist about reckless underwriting, with some pointing to “mad” underwriting decisions.
Kevin Pallett, managing director of virtual underwriter, Fusion, says: “[The data] available is being ignored, underwriters have the knowledge but the drive for trading is taking over. They are going for volume not profit. Trading has gone mad, and good quality underwriting has gone out of the window.”
Amanda Blanc, chief executive of UK broking, Towergate, said brokers across the country could cite examples of volume chasing from insurers. She put it plainly: “These sweeping statements are nonsense. I have hundreds of examples of crazy decisions being made. Certainly from the customer [broker] perspective it is as daft as it ever was.”
Yet while rates continue to plunge, commission levels are rising, with up to 50% being paid in SME business. This is “unsustainable” and “unacceptable” according to Chris Hanks, general manager of Allianz Commercial
Other insurers say there is a herd mentality when it comes to commission levels. “You have to follow the herd on commission levels,” says Alan Woof, chief underwriting officer of UKGI, Zurich. “We might be doing some cheap deals but we know what we are taking on.”
Pallet says some insurers are taking a long-term view: “Some players want to keep net present value to enable them to keep the business for eight or ten years. So they are happy to give high commissions for a short term hit. They might even take a view that this is a better way of doing business.”
But a combination of softening rates and higher commission will ultimately hit insurers’ margins hard. Perhaps only then will the market start to harden.
