Briefing: Why aggressive FCA will next turn to commercial insurance

Like a military ‘shock and awe’ campaign, the FCA has delivered a huge blitz on home and motor insurance in its mission to force change. 

Stunned brokers, insurers and price comparison providers are trying to reorientate themselves in this impending new reality.  

Price reform, and a crackdown on both premium finance and add-ons - all under consultation - should take up the regulator’s bandwidth for the rest of this year and part of next.

Yet there is more bad news: once the dust settles on those reforms, the regulator will inevitably look again at commercial insurance.

SME to face FCA scrutiny

The big emphasis coming from the regulator around home and motor is about providing value, rather than just price.

As part of this focus on value in home and motor, the FCA is particularly concerned about intermediaries adding on high-margin commission or charges at particular points in the sale. 

If we follow this pattern of thinking about value into SME, the regulator is certain to turn its attention here once more. 

For example, some brokers charge commission of up to 45% on products, in addition to an administration fee. 

In fact, the FCA has already warned about this particular problem in tradesman insurance. 

But there are other products out there where middlemen are taking a huge cut at the expense of the customer.

Another example is property, where the broker rewards the managing agent/landlord with huge commissions or remuneration.

In one questionable practice, Insurance Times revealed how Gallagher-owned Artex claimed it could make up to 47% more money for property partners than on standard commissions.

MGAs and brokers

This is all just the tip of the iceberg. Look at the practice that many (but not all) MGAs engage with. 

MGAs will have a profit share with the insurer, but then charge an administration fee when distributing through a broker. 

The broker will then add on its own administration fee, in addition to the commission. 

It gets worse: sometimes there may even be three or four intermediaries adding their own charges.

In other examples, the broker owns the MGA - but both parts of the business add on administration charges. 

There are simply too many clips on the ticket.

Full commission disclosure or fee

There is a very significant possibility that at some point during the next five years commercial insurance will end up one of two ways: full mandatory commission disclosure or regulatory-imposed fee-based charging to customers (rather than commission).

The landscape is too complicated for the FCA to attack it sector by sector, or product by product, meaning that just like in home and motor, it will turn to an all-sweeping solution.

What would be the impact of such a change? 

Full commission disclosure could put real pressure on the profit margins of larger brokers. EBITDA margins have gone up and up in the last ten years, reaching as high as 30% and beyond. 

Once brokers understand their rivals’ commission charges under full disclosure, it will use that information to persuade over customers.

Fee-based charging on all products would also give high transparency to the customer, although it would be an administration burden for brokers on low priced products. 

Ultimately, for years the larger insurance brokers have continued to expand their profit margins - partly through efficiency - but also through maximising their revenues during distribution.

With their consistent cash flows, repeat business and low capital expenditure, it is no wonder they are the darlings of private equity.

But as they old saying goes: if something is too good to be true, it probably is.