Some obstacles brokers face as they navigate the Covid-19 crisis could have a detrimental effect on their survival

As more and more businesses are forced to shut or re-purpose, and with staff being furloughed as well as some businesses being denied business interruption (BI) payouts, brokers are under increasing pressure.

And these brokers that are dealing with businesses affected by the lockdown could be in for a challenge when trying to retrieve commission. 

According to Simon Mabb, managing director for specialist broker NDML Insurance, the biggest pressures brokers will face will be their clients potentially defaulting on finance before the end of the policy and commission clawback hitting these brokers.

These warnings follow the two sets of guidance put out by the Financial Conduct Authority (FCA), on 1 May 2020. 

And secondly, the regulator will be sending out a questionnaire to 300 brokers in a bid to test their financial resilience as well as the impact of the coronavirus pandemic.

Commission clawback

In terms of commission, if a client has a 12-month policy via finance, on day one of the policy the finance is paid to the insurer, and the insurer pays the commission to the broker. However, six months in, if the client defaults on a payments and cannot continue to pay, the policy would be cancelled from that point on.

Therefore, the insurer will return 50% of the premium to the finance provider and the broker will be required to return 50% of the commission to the insurer.

A broker cannot forecast potential commission clawback as the commission is paid upfront and it is uncertain if and when the client might default.

“This is a potential timebomb that is hard to forecast for,” Mabb told Insurance Times. ”Also, the issues facing brokers around collecting cash from clients right now will have an impact. Whether it is struggling to get hold of people because businesses are closed, or because staff are potentially furloughed.”

”This is certainly putting extra pressure on our accounts team right now,” he added.

NDML are currently representing the Night Time Industries Association (NTIA) which acts for more than 100 pubs, bars, restaurants and nightclubs that have had to shut down due to coronavirus lockdown measures.

The NTIA recently teamed up with the Hiscox Action Group to pool resources and pursue legal action.

What guidance did the FCA put out?

On 1 May the FCA issued two sets of guidance covering product value and coronavirus; as well as coronavirus and customers in temporary financial difficulty. 

With regards to product value, the FCA said where providers have been experiencing difficulties in delivering benefits under insurance contract they should be taking action especially where they are unable to provide expected contractual benefits in the expected time frame or form. The regulator expects a product level assessment to be undertaken. The FCA said it is concerned that the risk could materially affected, it suggested that policies should be reassessed. 

And for financial difficulty the FCA have extended their help across the financial services sector to insurance premiums and seek to help customers having difficulty making repayments. The FCA suggests that customer risk profiles are reassessed and this could lead to a reduction in premium. 

If customers have asked for cancellations due to  not being able to afford it are indicating that premium instalments can be deferred for a period of up to three months without fees. Firms need to contact their clients in this instance. 

Demand down

Meanwhile Branko Bjelobaba, managing director of compliance consultancy Branko Ltd, told Insurance Times that brokers will also be suffering from a lack of demand for policies in those businesses most affected by the coronavirus pandemic.

“For clients in affected sectors such as retail, leisure, restaurants, pubs, that have had to close down and there’s absolutely no money coming into those businesses and staff have been furloughed, the insurance requirements [for these businesses] are going to be a lot less,” he said.

He added that in the instance that cover is reduced or even cancelled, there will be a direct impact on the broker because they will have to rebate their commissions.

“[Commissions] are the only way [brokers] earn money because they get a cut from the policy that they sell, they also charge fees for undertaking certain activities for the client – that is their sole lifeline,” he said.

And despite not having to return the money that furloughed staff are paid back to the government, firms still need to assess whether they have enough staff working to continue the running of their business sufficiently.

Ravi Takhar, co-founder and chief executive at premium finance provider Bexhill Insurance, said that while the pandemic means 2020 will be a year where businesses are impacted in a collective way, 2021 could see a return to normality. 

”We have to accept or acknowledge that these things happen in markets on a periodic basis – it means that there’s a shock, but life carries on afterwards,” he told Insurance Times.

And he believes that technology for brokers will continue to be important especially in terms of premium finance, with Bexhill Insurance being a tech-minded firm.

The next PPI scandal?

Bjelobaba believes that the impact of all of this on brokers could be “huge”, touting it to be the next payment protection insurance (PPI) mis-selling scandal for brokers who arranged business interruption for commercial clients.

“It could be another version of the PPI claims mis-selling scandal on brokers who arranged business interruption for their commercial clients,” he said.

He is also concerned that brokers professional indemnity policies might take the next hit as failure to secure claims pay-outs could see the broker being accused of setting up an “inadequate policy”.

Bjelobaba added that businesses might also look to cut back on unnecessary spending during lockdown to save money.

Worst-case scenario

Clive O’Connell, partner; head of insurance and reinsurance at law firm McCarthy Denning, told Insurance Times that the pandemic represented a worst-case scenario for brokers.

“While the PRA is keenly monitoring the solvency of insurers and their ability to handle potential pandemic related claims, the FCA is necessarily monitoring the ability of regulated brokers under its supervision to carry on business,” he said. “FCA regulated entities are required to carry regulatory solvency that would enable them to carry on and wind down their businesses in an orderly manner should a worst-case scenario occur.

“The pandemic is close to a worst-case scenario and one which affects not just one broker but the whole broking community at a time when policyholders are in need of significant support. The FCA survey is a necessary part of intelligence gathering that will allow the regulator to identify potential issues and to take action to protect policy holders.”

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