The paper, entitled ‘Broker Conflicts’, also reveals that much of a broker’s revenue is directly linked to the price of premiums so they benefit when insurance costs rise, which is currently happening partly because of the Coronavirus crisis.
Based on analysis of FCA data Mactavish estimates that potentially around one quarter of the 80% is legitimate commission leaving at least 60% of broker income in total being both premium linked and based on services to insurers rather than policyholders which is untenable as a market structure as the Covid 19 crisis has exposed.
In its new report, Mactavish also highlights that intermediaries have increasingly started to use over-standardised policy terms, which are often pre-defined as part of a broker scheme or facility that sees them work with a small group of preferred insurers on mutually beneficial financial terms. This has led to an increased use of generic policies that are often not adapted for client needs, and this long-standing problem has been brutally exposed by Coronavirus, with blanket refusals by insurers to pay the business interruption claims that companies across the country were counting on.
Bruce Hepburn, CEO, Mactavish said: “The Coronavirus crisis has exposed huge mismatches in expectations between policyholders and their insurers in terms of whether claims should be settled. We have become increasingly critical of the small print in insurance contracts and believe the current problem of Coronavirus claims being rejected highlights this issue well.
“It is only right that the role played by brokers in negotiating between insurers and their customers is reviewed, which is why we have published our report today. It asks hard questions about the role of the broker, how they earn their money and who pays them the most and reveals some shocking conflicts of interest that urgently need to be addressed by policyholders in terms of the way they manage their broker.
“Prior to Coronavirus, the insurance market was becoming increasingly unstable after years of declining profitability, which meant insurance premiums were beginning to rise. The current crisis will supercharge insurance rate increases as well as cover reductions to help pay for the flood of claims and insurers’ loss of investment income.
Last week Lloyds of London predicted a $200 billion hit to insurers from the crisis driving the same type of insurance market disaster that followed 911.
“Policyholders appoint insurance brokers to represent their interests, but few understand that in a hard market their broker earns more money as premiums rise, presenting an obvious conflict of interest. Brokers also 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.
“In the current crisis we can see more companies questioning the role their brokers play in securing their cover, and more intermediaries facing litigation from their clients who accuse them of not doing their job properly.
“Policyholders should also think carefully about whether a broking house whose own revenue is so dependent on insurers is best placed to pursue their claims.”
Broker remuneration – a time for change
To address the issues raised in its report, Mactavish is calling for a complete overhaul of how broker remuneration is presented and communicated to clients so that they can see more clearly if there are any conflicts of interest and address these if necessary.
It is also calling on employers to stop using a single broker (which is normal practice) to source their insurance needs and start tendering out their requirements to multiple brokers and have them bid for their business. They should use Written Line tenders at regular intervals, which entails brokers competing head-to-head against each other for a customer’s business, with each one working with their preferred insurers. While this may sometimes increase the management burden for insurance buyers, the cost savings, and improvements in quality of coverage achieved by this approach can be significant. Recent FTSE 250 cases where Mactavish ran this process for clients saw premiums fall by between 20% and 50% while improving cover.
Mactavish says adopting this approach should also provide companies with some protection against litigation from investors or other stakeholders who feel they have failed in their duty to secure adequate insurance.
Bruce Hepburn says: “The insurance sector is talking a lot about learning from the current crisis, and if they are serious about this they will address the scandalous broker remuneration set-up and the huge conflicts of interest it brings and agree a new way of explaining to clients how they are paid. This will provide those buying insurance with the level of control and power they should have over the purchasing process.
“However, clients should not hold their breath for this to happen quickly and should take steps now to increase the chances of getting the best cover possible at a fair and competitive price, and to do this they should start using multiple brokers instead of one, and introduce a greater level of competition over who wins their business.”
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