Brokers reducing panel sizes as an ‘unintended consequence’ of regulatory burden

Since the implementation of Consumer Duty in July 2023 – and before, with General Insurance Pricing Practices in 2022 and updated product governance rules in 2021 – insurers and brokers have noted their concern at the growing operational burden that compliance requirements have placed upon them. 

Complying with regulations is not a problem in and of itself, and most would agree on the necessity of balanced rules, but when they become onerous or are inefficiently implemented then unintended consequences can occur.

One such unintended consequence of today’s regulatory environment in the insurance sector affects brokers and the size of the insurer panels they maintain. 

Requirements for brokers to provide data to each and ever insurer they use on their panels to evidence fair value can become onerous, especially if the insurer is only used rarely for niche pieces of business. As such, many brokers – especially those on the smaller end – have reported a move to reduce the size of their panels to focus on fewer, bigger accounts.

Jill Hambley, managing director at Insurance Compliance Services, explained: ”FCA rules have placed a lot of regulatory cost on brokers and the end result is that some of them are starting to tell insurers ’I just can’t place business with you anymore because we can’t carry that overhead in time and cost.’

”Distributors have got a significant role to play and the complication for them is that it’s not just one insurer that they’ve having to deal with, but potentially in excess of 100.” 

David Sparkes, regulation director at Biba, added: ”This is a consequence of the product fair value requirements and the amount of questions that insurers are asking brokers for. It is making some brokers decide not just what agencies or insurers they’ll continue to use, but also what classes of business they continue to arrange.” 

Unintended consequences

In its Consumer Duty communications, the FCA has made clear that it primarily seeking to promote good outcomes for consumers. Part of this, it said in its December 2021 consultation paper CP21/36, involved creating “a race to the top” for the best products and services, as well as providing consumers with “a healthy and competitive market, where customers are given a real choice”. 

However, it could be argued that, were brokers’ insurer panels to become too reduced because of the compliance burden associated with maintaining them, then the FCA’s regulations were harming this consumer choice. 

Sparkes added: ”At the end of the day, brokers have to actually remain viable businesses to be able to help their clients on an ongoing basis. But if you take something like private motor, where commission levels are relatively low, then you might find that the amount of work you have to do in completing forms for different insurers actually eats away all of the income you make in that line.

“The FCA like healthy competition because it works in the interests of consumers, but if regulation is driving the opposite, then it’s time to look at it.” 

Announced last month on 14 May, the FCA actually recently laid out its plans to strip back the insurance rulebook in the CP25/12: Simplifying the insurance rules consultation. Included in this was a proposal to no longer require firms to review the value of their product at least every 12 months. Instead, firms would use the risks and characteristics of each product to decide how often they review them.

Sparkes explained that impacts, such as brokers reducing the size of their panels, was “one of the unintended consequences of the current rules” and that conversations between Biba and the regulator had helped lead the FCA to seek to rectify the situation.

Positive impact

Despite the FCA seeking to lessen some of the duplicated and unnecessary compliance burden that it has placed on insurers and brokers, it is not to say a reduction in the size of brokers’ panels is necessarily a negative – and it can even be a positive.

Brokers with panels featuring hundreds of agents and more are often seeking to reduce the size of their panels anyway to promote business efficiency, trading relationships and consumer outcomes. 

As Mike Bottle, Arch’s UK regional managing director, told Insurance Times: ”It’s inevitable that we’ve got to this point because of the amount of M&A that’s happened over the last 10 years, but if you were starting a business today, you wouldn’t decide to have as many as some brokers have – and with regulation, you can’t maintain 100 agents.” 

James Woollam, managing director at independent broker Hayes Parsons, also noted that regulation was not the only reason brokers were seeking to reduce the size of their panels. 

He explained: ”We, like lots of other brokers, are talking about reducing our panel. Regulation is absolutely one of the things driving it, but it’s not just been driven by regulation. 

”There are arguments for things like service to say that at 80 agencies, versus 150, brokers would give a better client outcome. And if you have lots of insurers [on your panel] with small accounts, it’s very hard – particularly for independent brokers – to be able make changes and representations around service. Whereas if you’re able to concentrate your business in a smaller number of large accounts, that does give the ability to talk to insurers around service more effectively. 

”If we couldn’t provide the client with everything they needed as a consequence of a reduced panel then that would be a big issue. But, fundamentally, if you can provide that service with fewer agencies, then that’s a good thing.”

Hambley echoed this, adding: “It varies from broker to broker, but there’s an argument that, if you reduce the size of your panel, then you get a better understanding of those markets that you’re dealing with. It’s not a given that a smaller panel is bad for the consumer as long as it’s done correctly.”

And while the FCA may not have intended to put pressure on the size of brokers’ insurer panels, there could still be market-wide improvements in service alongside potential impacts on competition. 

Woollam finished: ”That drive to the right thing for the clients meant that a lot of brokers were sitting on up to 150 agencies, with maybe a third of those only having a handful of risks. 

“Now, because of that regulatory cost, brokers have been more careful about the agencies they open. I don’t believe the regulator had that in mind when they brought this regulation through, so it’s an unintended consequence, but I am pleased that it will lead us to an outcome that will make it good for the client.”