The financial relationship between brokers and insurers needs to become a lot more transparent according to a new report which says intermediaries are often paid more by insurers then they are by the client for the placement of cover.
In a new report policyholder advisers Mactavish have said clients should be given the opportunity to know just how much intermediaries are earning for placing their risks.
The firm said that brokers can earn up to 80% of their revenue for a transaction from the insurers and questioned the ability for intermediaries to be acting in the best interests of their clients if they were earning more money from the underwriter.
“Brokers receive substantial premium-linked revenue from services provided to insurers creating a second potential incentive to put the interests of insurers above those of clients,” said Mactavish. “A hopelessly conﬂicted and untransparent broker system has been allowed to develop during a long soft market but it is now being brutally exposed. A hard market exacerbated by a once in a generation Covid-19 recession gives this anachronistic structure nowhere to hide – and in the absence of stringent regulator action clients must drive reform alone by taking greater control of their placement.”
It added it was surprised that last year the FCA closed its own investigations into the wholesale broking and intermediary sector without addressing the “inequity in the distorted system that favours brokers and insurers over policyholders”.
“In this context, why would you appoint a broker on an exclusive basis to act on your behalf, rather than competing them head to head and ensuring that these conﬂicts do not negatively impact your costs and cover?
“The only option for commercial policyholders is to take control of the placement process themselves.”
Mactavish said clients may not realise that the placement of their insurance can trigger a wide range of other payments to the broker by insurers, many tied to the premium placed with the insurers in return for services provided to them.
“As insurance premium rates are rising sharply in some lines of business, so these payments can far outweigh the fees brokers are paid by their clients. This, therefore, has the potential to lead to signiﬁcant conﬂicts of interest.
“This aspect of the market has long attracted attention, although concern is more limited if the values involved are small. But as insurance markets harden and prices rise, the risk of conﬂict for brokers escalates. As a result, we believe it is time this subject gets properly scrutinised to ensure that policyholders are fully able to understand the potential conﬂicts and talk to their brokers about how those conﬂicts are being managed and what effect they have on their insurance spend.”
It was at pains to point out not every broker takes payments from insurers. However, for those that do there is a disappointing lack of full transparency surrounding the form of these payments, the reasons for them and the sums involved.
“Many broker terms of business agreements (TOBAs) pay lip-service to transparency while in practice doing more to confuse than clarify – discussing generalities of payment types in pre-printed standard documents that do not set out what payments apply to the client’s own case, or how much they are. These are important details and transparency standards in commercial insurance fall well short of those in the consumer segment,” added the report.
Mactavish said: “The key question remains: do clients know what their brokers earn from insurers for providing services to the insurer as a result of the client’s placement, either directly or because it is part of a portfolio payment? The net balance of remuneration derived from clients and insurers is considered in the next section of this paper, also drawing on FCA statistics.
“Mactavish believes the only viable solution to this problem is for commercial policyholders to run head-to-head tenders with brokers (Written Line Tenders) and demand full and account-speciﬁc transparency so that they can take an informed view of the potential conﬂict created, and negotiate to rebate and replace any elements of concern through adjustments to their fee.
“To do this, brokers at a case level should proactively disclose every aspect of remuneration applying to the placement in the client renewal report and explain the services to which each fee relates. This should not only include all sources of broker placement income but also an estimate of the non-placement, portfolio-level income attributable to the client’s share of premium. This may take some effort to analyse and allocate sensibly within client disclosure but the task cannot be insurmountable if the desire to be transparent exists. If this is not done, client conﬂicts will always remain unmanageable.”