FCA wholesale broking probe cut could insurer costs - Fitch

The FCA’s probe of competition in wholesale broking could help London market insurers cut their costs, ratings agency Fitch has said.

The FCA launched the wholesale broking probe on Wednesday in a bid to ensure the market is working well and in the interests of clients.

In a statement today Fitch said the FCA’s market review “could help counter the trend of risking expenses for London market insurers”.

This in turn could make London more competitive with smaller hubs in other parts of the world, which have been gaining market share in recent years at London’s expense, the rating agency added.

According to Fitch, rising broker commissions have contributed to pressure on insurers’ underwriting results. The agency said: “Any steps by the regulator to reverse this trend could therefore be positive for London market insurers in the long term.”

It added that Lloyd’s data shows average acquisition costs – predominantly broker fees – rose to 22% of gross written premium in 2016 from 17% in 2005. Fitch said: “This has been in part driven by the prolonged soft market as falling premium rates put pressure on brokers’ commissions.”

Losing market share

The relatively high cost of doing business means London’s share of emerging market business has shrunk in recent years, while those of local hubs in Singapore, Bermuda and Zurich have grown, Fitch said.

The rating agency warned that aggressive measures from the FCA could prompt brokers to route more business to other markets, but it added: “We think the risk of this is limited because there is strong underwriting expertise for more complex risks in the London market and this is unlikely to change, at least in the medium term.”

The FCA study will examine three main areas: whether brokers can raise the price of their services beyond normal market levels; how conflicts of interest affect competition and client outcomes; and how features such as broker facilities affect competition.

Broker facilities allow a broker to place a certain portion of their business with participating underwriters on pre-agreed terms. Broker facilities have been controversial in the London market because they can exclude smaller underwriters and potentially harm competition.