Is commission disclosure on its way?

On the surface, the results of the European Commission’s inquiry into business insurance competitiveness seem relatively benign, but reading between the lines, the weighty report hints at an overhaul of Europe’s broker industry.

In its final report, published last week, the EC expressed concern over the disclosure of brokers’ remuneration, particularly in relation to commissions. It said there was a lack of transparency that could undermine fair competition and may create conflicts of interest.

The EC said: “Insurance intermediaries, the market surveys and the public consultation highlight the fact that current market practices – in particular the lack of spontaneous disclosure of remuneration received from insurers and other possible conflicts of interest – create an environment in which business insurance clients, in many cases, are unable to make fully informed choices.”

The report was critical of contingent commission saying that, even with disclosure a conflict of interest is still likely to exist, leading a major UK broker to question whether the practice may soon be banned.

The EC argued that any practice that may encourage brokers to place business with a particular insurer in order to grab a greater slice of commission could be deemed anti-competitive.

Although the EC stopped short of mandating any changes to commission disclosure, it called for an industry appraisal of its practices.

It also said remuneration transparency would be considered during a review of the Insurance Mediation Directive, the directive which underpins most UK broker regulation.

This is a significant shift from the EC’s earlier stated position that it would not be making any recommendations.

According to some experts, it paves the way for the EC to force brokers to disclose their commission.

Andrew Hobson, a competition expert at Reynolds Porter Chamberlain (RPC), said: “The EC’s clearly marking the insurance industry’s card. While its processes may at times seem glacial, I don’t think this report allows us too much room for complacency.”

Broker remuneration legal expert at RPC Kenneth Underhill said that reading between the lines it was clear the EC wanted to go for compulsory disclosure of commission.

He said: “The problem of the types and the amount of commissions being sought by brokers has begun to creep back into the market place and it looks like the EC has the bit between its teeth on this one.”

The EC’s findings come as the FSA is reviewing whether brokers should be required to disclose their commission levels up front – so called hard commission disclosure.

Even if the FSA ultimately decides against hard commission disclosure, it could be overruled by the EC, if it were to change the Insurance Mediation Directive.

The issue of broker commission transparency has garnered a lot of controversy, with the insurance industry essentially divided.

But in the days following the release of the EC’s report, Biba launched a scathing attack against the findings.

The trade association branded the inquiry pointless claiming its members had taken adequate steps towards transparency, including changing the terms of business agreements to remind customers of their right to be advised on the commission brokers receive.

Biba said it was concerned that the EU competition inquiry regurgitated details of the Spitzer investigation when it has never been suggested such misbehaviour as is alleged to have occurred in New York ever took place in the UK.

It also argued there was little evidence of commercial clients asking for commission details, concluding that the current process is as transparent as the policyholder wants it to be.

The EC addresses this argument in its report, stating that there is evidence small businesses have no idea how much commission brokers take, and often mistakenly assume it to be a far lower percentage than the reality.

The International Underwriting Association strongly applauded the EC’s call for greater transparency. And Airmic said: “The report rightly recognises that there are areas of the market, especially those in the SME sector, that are poorly served in this respect.

“We hope the inquiry will lead to a situation where all buyers of commercial insurance routinely and automatically receive full disclosure as to how much of their premium the broker receives.”

Alex Moczarski, Marsh’s chief executive for Europe, the Middle East and Africa, said the report said that transparency was key to ensuring that brokers put customers first.

Marsh has already adopted a system of broker transparency following the Spitzer investigation in 2004.

If the EC presses ahead with the changes at which this report hints, other brokers may be sen to have no choice but to follow suit.