An Insurance Times investigation finds property agents are turning to captive set-ups to make large profits on underwriting, while disclosing smaller commissions
An Insurance Times investigation can today reveal details of the growing use of lucrative captives as alternative to property commissions in the controversial real estate market.
Insurance Times investigated a Gallagher-owned insurance business called Artex, and its captive practice with property managing agents and property owners.
Artex claims it can make property partners up to 47% more money than on standard commissions, which themselves have come under intense regulatory and public scrutiny for their high commissions and lack of transparency.
Following a probe five years ago from the Competition and Markets Authority, Artex claims many organisations are turning away from property commissions in ‘response to commission disclosure proposals’ leading to ’an increasing demand to create innovative structures’ such as captives.
Whereas the standard practice is for property managing agents to earn money just from commissions, the Artex scheme allows property partners to become both an intermediary and risk carrier, taking income from both commission and underwriting profits.
Insurance Times has found that both AXA and Lockton are two companies that have worked with a property managing agent on the Artex scheme.
But the practice of using captive arrangements has been called into question by both leaseholder campaigners and Sir Peter Bottomley, co-chairman of the parliamentary group looking into leaseholder reform, who has serious concerns over its ‘fairness’ and ‘transparency’.
Captive arrangements
The Artex scheme works by getting a property management agent, or property owner, to set up a captive.
In an example used in Artex’s own marketing materials, the captive reinsures the insurer by paying the first £100,000 of each claim.
In return, it gets 50% of the premium.
Losses for the captive are capped at 125% of the total premium.
Meanwhile, the broker gets a 10% commission and the property managing agent gets a 10% commission.
Artex example below of how captive profits are considerably higher than taking a standard 30% commission
| Structure | Income (average per year/£) | |||
|---|---|---|---|---|
| Commission income | Underwriting Income | Total income | Comparison | |
| Existing commission only | £523,864 | Nil | £523,864 | |
| Captive with 50% of premium | £174,622 | £454,254 | £628,876 | 20% more than standard commission |
| Captive with 60% of premium | £174,622 | £593,951 | £768,573 | 47% more than standard commission |
Bottomley told Insurance Times the use of captive arrangements was deeply concerning.
“Things should be fair and transparent and there should clearly be a competitive element when people are arranging policies that leaseholders are paying for,” he said. “I am not satisfied that captive insurance meets any of those.”
Bottomley places fault to those at every stage of the process – the managing agent, broker, insurer, and the captive management company, for allowing this to happen.
“Once we get to the stage where all commissions have to be disclosed, to have alternative arrangements where there are profits in a captive insurance company shows that people are evading the purpose of the rules,” Bottomley said. “The purpose of the legislation is to prove this is fair, transparent and best value for leaseholders.
“If there is reason to believe the marketing materials are saying there is more money to be made by going behind a closed curtain, then it is improbable that this is in the leaseholder’s best interests.”
Artex declined to comment on matter, but Insurance Times has spoken to one lessee of a property agent using the Artex scheme, who said they had found information on the captive arrangement hard to come by.
While the RICS-registered property agent in question told Insurance Times the captive arrangement is “a risk-based, fully compliant structure which is openly disclosed to all clients,” the lessee claimed no information had been actively provided on the captive and the profits it was making.
Minutes from an AGM this year show it took one resident to ask the property agent’s founding director directly about the captive, for its existence to be confirmed. The resident asked for a written response to his question and alleged the director failed to reply to an email a year before.
Market responsibility
There is no evidence that Artex has been encouraging property agents to conceal captive income. But Bottomley says brokers and insurers should not be facilitating this practice.
“Each of the people involved has a responsibility to say we will not take part in something which is improper or wrong and we’ll disclose it if others are,” he said.
“What drives me is the message we should all be taking on – don’t rip off leaseholders.”
Neil Holloway, a former commercial buildings broker now specialising in recovering money on behalf of leaseholders, says the practice of using captives is wrong.
He says captive arrangements make leaseholders less likely to be aware of how the agents are still making vast sums through insurance.
“Some firms can use this as a dodge to avoid disclosing the earnings they are taking,” he says.
“This captive arrangement makes it difficult for the lessees to find out what the earnings are, because they say there is no earnings as it’s a captive arrangement.”
Market feature
David Williams, managing director of underwriting and technical services for AXA, said that captive arrangements are a common feature of the real estate market.
He said: “The relationship between the owners of properties, tenants and managing agents is complex and we would always encourage transparency between the parties, their insurers, and if appropriate reinsurers.”
A spokesperson for Lockton added that it works with a number of clients to negotiate captive arrangements with insurers, and that it is established industry practice.
They said: “Captives encourage proactive risk management and greater alignment of interests for all stakeholders, which can ultimately drive efficiencies within the insurance contract including coverage and costs.
“These arrangements are fully compliant with regulatory requirements and offer fair and comprehensive cover for the risk taken on by the client.”
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