Mandatory commission disclosure – there is an upside

The European Commission’s decision to push ahead with mandatory commission disclosure for general insurance brokers is a blow to the industry.

But while brokers should be concerned, they should probably not be downhearted. It is also an opportunity for brokers to demonstrate more clearly the value they add to a transaction.

The commission revealed its intention to implement mandatory disclosure in the draft of the revised insurance mediation directive, also known as IMD II, which was released yesterday.

It is particularly galling because, as Biba pointed out, the commission appeared to ignore the advice of not only broking representatives throughout the continent, but also the European Insurance and Occupational Pensions Authority (Eiopa), the UK Treasury and the FSA.

Mandatory disclosure of commissions, rather than the present disclosure-on-request system, is likely to put an even greater squeeze on broker commissions.

Clients who would not have already seen the commission rates will now get sight of them. Most clients, particularly in personal lines, are unlikely to have a full understanding of what a broker brings to the transaction, and so for them, the commission will invariably be too high.

Coupled with this, as Biba noted, there is no equivalent disclosure requirement for direct insurers, and so consumers in particular could be led to believe that using the broker channel is more expensive.

In addition, the commission rates brokers charge will become more transparent to their rivals, which could prompt even greater price competition.

However, brokers should take heart from the fact that IMD II, is still very much a draft. This can be seen clearly by the number of crossings-out in the document itself, and also the vagueness of some of the proposed changes. For example, the draft said brokers’ cross-selling practices would have to comply with future guidelines to be drawn up by Eiopa.

What this means is there is still plenty of scope for brokers, through Biba and its European counterparts, to state their case and potentially make changes.

There is also time for brokers to steel themselves for mandatory disclosure. The commission disclosure part of IMD II is not due to come into force until 2019.

Perhaps brokers should use this time in communicating their value more clearly to personal lines customers in particular. Many do not differentiate insurers from brokers, and so do not realise the different roles each play, and the value of those roles.

Brokers do not help themselves here. Many describe themselves on their websites as ‘insurance providers’ rather than brokers.

Perhaps if the general public knew more about what brokers do for them, they will be more willing to accept commission rates.