Meanwhile others in the industry have also defended brokers
The insurance industry has disputed Mactavish’s claim that the broker remuneration model presents a “huge conflict of interest”.
Biba has said that: “Remuneration by way of commission is actually beneficial for customers who are able, because the broker is paid in this way, to receive advice before having to commit to buying a particular insurance policy.”
This, the trade body specified, was because brokers are the agent of the client as well as the insurer and one of their fundamental roles under the Insurance Distribution Directive (IDD) is to act in their customer’s best interests, which Biba says is exactly what they do.
The FCA’s Senior Arrangements, Systems and Controls (SASC) rules outline a number of requirements in managing conflicts of interests, something which brokers are required to abide by.
Opportunistic
Brokers acting on behalf of an insured can be paid for their services in several ways, a simple fee arrangement between the broker and client, or more commonly through a commission that is agreed with the insurer but taken out of the premium paid by the insured.
In some circumstances, the insurer and the broker may have entered into a further arrangement whereby the broker receives an additional fee or commission from the insurer for bringing in a certain volume of business or reaching agreed profit targets.
This is known as a contingent commission, placement service agreement or market service agreement. Contingent commissions have raised questions about the lack of transparency and the potential for conflicts between the broker and client.
But disclosure of commission to commercial customers is only required if the customer requests it from the broker.
Biba argued that given the highly regulated nature of the insurance sector, Mactavish’s report could be considered “opportunistic” and in light of their business model designed to allow them to gain from these published opinions.
Meanwhile the trade body, added: “Conflicts of interests will always exist in any intermediated sector, which is why the FCA requires and monitors that these to be managed, which they are. The FCA examined conflicts within a thematic review quite recently, and taking their findings into consideration we wholeheartedly dispute the issues raised by Mactavish in their report.”
‘Brutally exposed’
Mactavish claimed that this ”conflict of interest” had been “brutally exposed” by the coronavirus pandemic.
But Biba responded: “Brokers have helped clients receive millions of pounds in claims payments since the beginning of the Covid-19 pandemic and continue to act for their clients to get fair claims settlements.
“It would be against competition law to speak about potential premium increases, but we draw attention to the fact that insurers have been giving payment holidays and providing refunds on some classes of insurance, such as car insurance, as claims costs and accident risks have reduced in line with fewer vehicle journeys.
“Brokers are transparent on commissions and on request will gladly provide full details of earnings to clients.”
Paul Stanley, chief executive at insurtech 360Globalnet agrees that brokers should not be blamed.
He told Insurance Times: ”I don’t think that brokers should come in for criticism where coronavirus is used as a rod to beat them with. If virtually all the world was not prepared for this pandemic then what chance brokers?
”The best broker-client relationship is when the broker fully understands your business in a long term relationship, and the company has some idea what it wants to protect against. In our case our brokers have been with us since the inception of the business and do a great job. We do have infectious disease cover on our business interruption policy, but we never foresaw a country-wide government imposed lockdown, so why the attempted blame-shifting to brokers?”
Not new
But this debate is not a new, it is something that the financial services sector has debated for a while, according to compliance expert Branko Bjelobaba, managing director at Branko Limited.
He explained that advisers have to be professionally qualified at minimum of level 4 and certified competent by their employer on an annual basis, as well as receive a Statement of Professional Standing from the Chartered Insurance Institute (CII).
“The vast majority of general insurance broking firms are not chartered, and their staff do not need professional qualifications to sell [or] advise,” he told Insurance Times. ”So how close is the sector to being a profession and charging for advice? Would consumers pay for advice or is everyone happy with the status quo with insurers paying a commission to the broker for the policy sold?
“Honest observance of the ’honest, fair and professional’ rule would sort it as culture and behaviour awareness is paramount. There are plenty of brokers never influenced by commission arrangements.”
Ashwin Mistry, chairman at Brokerbility told Insurance Times that commission payments to brokers has been around as long as he can remember with ongoing debate. He raised some key issues with the Mactavish report.
- Remuneration disclosure is now at the policyholders behest and brokers have been required to supply that information as requested for sometime now. Further brokers have to highlight the same.
- At the lower end of SME and almost all private lines or domestic Insurance commissions is the only equitable way of remunerating brokers. A fee structure at that level will just not wash with end clients. This cohort of all policyholders perhaps represents around 95%+ of all policy holders in this country, if not more. This Mistry said puts the Mactavish Report into context and this needs to be acknowledged by them. Sweeping comments are dangerous.
- There is an underlying assumption in the report that commercial clients in the main are ignorant and not market savvy. They are business people for a reason and will question price and value in everything they do, this includes Insurance.
- Broker’s professional responsibility is at an all time high. They are required to assist clients in all aspects of risk and risk management. It is an arduous task. Risk has changed beyond all imagination now as new and emerging risks have emerged over the past few years, including cyber, directors and officers (D&O), employment pratices liability (EPL), environment impairment liability (EIL), supply and customer end chains etc. The list goes on.
- The report can be misread or misunderstood by so many people especially now and paints an unfair picture of reality. It does indeed grab headlines so if that was the objective, then job done. It totally undermines the excellent work the intermediation market now does and eroding that even further will have dire consequences for limiting customer choice and also how advice can be sought in so many areas. Mistry referenced the consequences of High Street banks and Building Societies pulling out of the advice arena when commissions were banned.
- Finally, the report completely distorts the views of insurance in general. The fundamental principles of insurance are assessing and underwriting known quantifiable risks and the losses of the few are paid for by the many.
Mistry added that the pandemic was a completely unforeseen event and even if cover was available, he questioned what price range clients would have to pay five or ten years ago.
”This Pandemic has impacted all sections of community and not not just business. State bailouts will have to paid by maybe future generations.
”We know from publicly quoted numbers the take up rate for both D&O and Cyber is extremely lower than one would reasonably expect with all known exposures here and now,” he said.
Read more…BI coronavirus payouts could spell commission clawback worry for brokers
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