The insurance industry finds itself in a defining moment, says Stuart Reid

By Stuart Reid

Stuart Reid

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Anyone with even a passing interest in the UK insurance market could not have missed the news from the FCA last week.

The regulator sent a letter to insurers and a separate Dear CEO letter to industry chief executives detailing its early findings on Consumer Duty.

What is interesting to see is the assertiveness being shown  – and from the little we can gather from the FCA’s reporting, it certainly appears due.

We also got the first insight into some of the measures that the FCA is using – and what they reveal.

Any firms that fall short of the measures set out in the Consumer Duty are obviously not a good look for our industry, particularly as recent news comes hard on the heels of the property insurance commissions debacle.

Responding to this scandal, the FCA said it found incompetence and unjustifiable remuneration, while Secretary of State Michael Gove was “outraged” by the findings.

Micheal Sicsic, former head of supervision at the FCA and managing partner at highly respected compliace consultancy Sicsic Advisory, said in a recent speech that the FCA’s recent communications “question the whole model of paying by commission”.

It is around this point that many I have spoken to have expressed real concern.

Commission model 

Throughout my career, there has been talk of changing the commission model – and property insurance was called out as a good reason for that change.

Was it the insurers who were at fault for the high commissions given to win or retain business, the brokers for demanding such, or the ever increasing demands that came from freeholders or managing agents for a larger share?

Whatever the cause, the issue was known by all – and yes I do mean all – to be a broken part of the market that needed reform.

But this example was an outlier, at least in my experience. The FCA has identified some further outliers, as set out in their recent communication, but these are, by their very definition, “outliers”.

To consider change to the commission model generally should worry us all because, while it’s not perfect, it works.

Clients cannot easily differentiate between a broker’s value based upon commission payment – a lower total price does not always provide greater value.

Make commission an industry-wide competitive element and there will be a drive downwards that reduces the ability to provide good value, particularly to smaller clients.

How do I know? Just look at how difficult it is to get advice for those with a small pension!

Some firms are freely transparent and make it work, but open the market up to full transparency and the shock will be seismic.

This would not deliver the value to customers the FCA is rightly demanding, but it would do the exact opposite.

The FCA’s multi-occupancy building review was the first time the regulator looked at broker remuneration through a fair value lens.

The regulator warned it had seen “significant shortcomings by some brokers in applying fair value rules to their remuneration practices” and that commission increases due solely to rising premiums would not necessarily be justifiable under fair value rules.

This might make sense in isolation, but obviously forgets the soft market and the reducing premiums and commission we have seen for years.

Trade body influence

Biba have done some fantastic work, in conjunction with the government, the regulator and many more besides, to address the issues that are driving this debate.

A new reinsurance scheme that should allow more affordable cover for those affected by cladding is due and a framework for brokers to use this that will help demonstrate the earnings they receive are fair value is a great example.

What this does prove is that, with the FCA moving to more data-driven regulation, it is imperative we all support trade bodies to ensure we have a voice – and support them in finding solutions to the challenges that occur.

I firmly believe we, as an industry, find ourselves in a defining moment.

This early snapshot from the FCA, which wants “more action”, is a timely reminder of what is expected and I have set out here what the consequences might be if we get this wrong.

Yes, there will be outliers, but at the heart of it, what we do is provide much needed peace of mind that is unavailable elsewhere.

This is our true value and we need to take this opportunity to prove it.

Failure, it seems, could bring a change to our industry that would be tumultuous – and who wants that?