Broker management forum

Richard Adams: Do you think there have not been any Spitzer-type investigations in the UK so far because of the way the UK market operates?

Peter Staddon: We do things differently over here. We do work very closely with our clients; we provide an excellent opportunity for them to get the right product and, of course, we work very closely with UK public limited companies. So I believe we have a completely different regime to that of the US. There have been some allegations - which have yet to be founded, in my opinion - but I think our market is completely different to the US and it is much more stable and much more grown-up.

Kevin O'Flanagan: I would agree. The US market is also quite unique in that it is not, technically speaking, one market; it is actually 50 separate markets because US insurance is regulated at state level, not at federal.

Richard Adams: One of the things that Spitzer has ushered into the UK has been the debate and dispute about the need for greater transparency. Spitzer has also firmly put the way brokers are paid into the spotlight. David Gamble from The Association of Insurance Risk Managers is of the opinion that the only truly transparent system is one where brokers are remunerated by clients. Should volume commissions go?

Kevin O'Flanagan: Not necessarily, but going back to what David Gamble said, it is interesting in this soft market as well in that, if more fees were paid, to some extent brokers' income would have been insulated against the fall in the soft market where it is commission-related. There are UK insurance practice laws based on old-fashioned agency law where the broker is the agent of the client and not the insurer. The fact that he gets his remuneration from the insurance company through commission is a grey area, which is catered for within insurance law, within the Financial Services Authority's regulations. It would simplify things if it was fee-based going forward for larger and commercial, or medium-sized commercial. That is a possibility, so that the client knows he is paying for the service of the broker and the broker must do what is necessary to get the client insured. You could arrive at a fee structure for every type tof insurance, if you had to so. In theory, what David says is possible and it could happen, but it is a long way off.

Steve White: I think there are three points here; first, we should all remember that this process is only as transparent as the customer wants it to be. The law of agency and the FSA rules require disclosure upon the request of the customer so, if the customer makes the request, he is going to get the information. Second, this is an evolutionary process and discussions between brokers and customers could lead to the customer saying: "I want to pay for your professional services", and that could very well lead to a net rate solution. It fits certain parts of the market maybe at the moment but I do not think it fits the whole commercial market yet, and whether it will is a matter of some debate. In terms of volume overriders, I do not see there is a problem with any form of remuneration method per se, I think the issue is one of conflict management, as we have said, where the intermediary has a primary duty to his principal, i.e., the customer. And, provided he can manage the potential conflict of interest that any form of remuneration throws up, then I do not see it being a fundamental problem.

Peter Staddon: I am wondering whether or not it would lead to the clients paying more in the long term. What clients want is good-quality advice - advice from the broker and insurer market so they know where their risks are being placed, that they are being placed correctly, in the proper manner and that they have full protection and I think there is a cost to that. I do not believe that brokers are remunerated the way they should be and I actually think that, if you went to fees, a lot of clients will end up paying more.

Richard Adams: That is one of the parallel arguments that run alongside some of the things that Spitzer has brought to light.

David Bruce: Yes, in the aftermath of Spitzer there have been a number of brokers looking to negotiate certainty around their remuneration policy and a lot of those brokers have been asking for more commission. It raises the debate about who pays for that. There is one scenario where you could see our prices having to go up to pay brokers more commission.

Steve White: At the end of the day it is a tripartite agreement between the broker, the insurer and the client. We need to work more closely, we need to work with risk management, looking at evaluating the risk.

Richard Adams: Regarding the difficulty of moving to fees and the suitability of products. Is that something a broker should be looking to do across the board and what does the British Insurance Brokers' Association advise if brokers are thinking about going over to fees - what is your advice to them?

Steve White: I think there are two things. First, there is very little evidence that we have picked up at BIBA that commercial customers are asking what the rate of commission is. It is a question that is not often asked, so are we in danger of introducing an extra layer of complication in discussions with certain commercial customers? Second, a very important thing to bear in mind here is that brokers' commission income covers the expenses he has in running his business. If he picks up one in four risks he quotes on, he still has expenses from the other three. I think there is a reluctance in certain elements of the commercial broking market to move from the existing remuneration structure.

David Bruce: If you look at the life industry, what you will find there is a lot of independent financial advisers are charging potential customers for advice regardless of whether they actually pick up and arrange any policies on their behalf. And I think that would be inevitable, if you move to the situation Steve talked about.

Richard Adams: Moving on to the EU's investigation. All the things we have been talking about thus far, best practice and what the future looks like, are partly done with an eye to future investigation, which obviously the EU is about to launch. Steve, could I ask you to give a brief overview about what is involved with that.

Steve White: Let's take a step backwards. What we are facing here is an EU competition enquiry into retail banking and commercial insurance across the entire EU. I think they will be looking at things like barriers to entry and cartel arrangements, I do not believe they will find too much evidence of that in the UK market. I think what is more fundamentally an issue to a lot of UK intermediaries, certainly those in the London area, is that the inability of the EU as whole to implement the Insurance Mediation Directive on time is causing UK intermediaries problems in passporting their services out around Europe.

Richard Adams: Gordon Haynes of Health Insurance Holdings asks where do the boundaries lie now with incentives and their variance, how does the industry know that what it is doing is likely to be acceptable to investigators. David what does this mean for Norwich Union and for insurers generally?

David Bruce: I think what it just means is that insurers such as Norwich Union have to look at the way in which they reward their intermediaries. I think we can be clearer on what we are remunerating them for, ensuring that those intermediaries who perhaps do more work for Norwich Union than others and undertake tasks other brokers do not, are getting fairly rewarded for that.

Richard Adams: Peter, do you think that this investigation could actually see any rule amendments in future?

Peter Staddon: We need to look at what they are trying to do. They are coming in to see if there are any problems in the UK market. I think the simple answer to that is: no, there is not. There might be some little tweaks that need to be dealt with, let's say for the sake of argument, new entrepreneurs coming in - can they get into the market to be a broker because of regulation? Can they actually start dealing with all the insurers, because some of the insurers, let's be quite honest, would need a certain minimum level gross written premium? The brokers just starting out, where are they going get it from? There is nothing fundamentally wrong with the UK market and the way in which it deals.

Steve White: I totally agree; remember, this is an EU-wide investigation. I think we can hold our market up against any other market within the EU and declare it to be the benchmark by which the rest of the EU should be trading against.

Kevin O'Flanagan: I have actually worked in a couple of those other EU countries. What Peter says is totally correct and what is interesting is this EU investigation might be for the benefit of the UK insurance industry on a European-wide scale because, yes, they will find fault on some usual technical procedural things but, in actual fact, if the British insurance industry gets the greatest clean bill of health compared to that of France, Germany, Italy, etc., it will actually enhance its status within the EU and throughout the world.

Steve White: Kevin is absolutely right, it is far easier for an intermediary anywhere else in Europe to place his risk in the London Market than it is for a London broker to place his risk in any other European market. The UK market is one of the world's leading markets, it attracts more capital than most other markets in the world, and that is because it is one of the best-regulated.

The next Broker Management Forum will look at fraud in commercial insurance, and will be chaired by Alex Broad at 2:00pm on Thursday, 8 December. Panellists will include Mike Boon of Cunningham Lindsey and David Grant of NIG. Register to take part at www.brokermanagementforum.com

THE PANEL

Richard Adams, Editor, Professional Broking

David Bruce, Director of national accounts and brokers, Norwich Union

Kevin O'Flanagan, Managing director, aascent

Peter Staddon, Head of technical services, British Insurance Brokers' Association

Steve White, Head of compliance and training, British Insurance Brokers' Association.