Airmic's Code of Conduct is proposed in a spirit of openness and dialogue, not as an attack on brokers, explains executive director David Gamble.
Airmic's Code of Conduct is proposed in a spirit of openness and dialogue, not as an attack on brokers, explains executive director David Gamble.
A lot has been written in Insurance Times in recent weeks about brokerage services and remunerations and, in particular, Airmic's position on this.
Unfortunately, some of the commentary has been inaccurate and I would like to set the record straight.
First, some in the market and the media, appear to have the incorrect impression that Airmic is "attacking" brokers over this issue. It is not, it is seeking transparency and dialogue.
Secondly, Airmic is not trying to "squeeze the industry".
Our aim is to improve relationships between insureds, brokers and insurers.
Airmic is not even looking for a radical change in the basic structure or system of insurance purchase, merely more clarity and a transparency about what actually takes place.
We believe that with greater transparency and the elimination of incentive payments there will be more focus on the efficiency of the broker/insurer relationship, which will benefit the overall work of the London market in time.
Transparency is not an issue centred on the rights and wrongs of the process of insurance purchase – it is about awareness and knowledge of the process.
Airmic and its risk and insurance management members work within the insurance purchase sector and are an integral part of it. Our members know it well, but could, and we believe, should, know more to enable them to better perform their professional duties. They can do this only if there is full transparency.
Risk managers are tasked with finding the best, solutions to the risks that face their organisations. Brokers have a valuable role to play in advising risk managers of the range of insurance options available and the respective costs involved.
If that includes broker fees for work done by them on behalf of the insurer, then so be it – but let risk managers know, so that they can make evaluations of potential solutions based on a complete knowledge of the situation.
Professional risk managers recognise that the cheapest insurance option will not always provide the most cost-effective and risk-free answer. Risk managers should be willing to pay for good value.
Insurance may be just one of the risk management tools used in tackling a risk and its use needs to be evaluated against a wide range of variables. Any doubt or limitation as to the range of insurance cover, or lack of clarity over what is being purchased will make it more difficult for a risk manager to provide a considered evaluation on a proposed decision.
Professional risk management has a beneficial effect on the corporate bottom line because risk managers add value to an organisation's performance.
But they can do this only if good decisions are made on a range of risk control and financing options – including insurance purchase. Increased transparency leads to improved decision-making.
As the ultimate customer, surely the insured is entitled to know the full details of what is being purchased – what one is getting for one's money? All risk managers ask for is an accurate breakdown of the ingredients which make up the product or service they are buying.
Transparency creates and builds trust and this is vital in a people industry such as ours. Until the situation is made clear the simple question risk managers will always ask is: "Who does our broker work for?" Airmic has sought to gain improved transparency since 1998 when some of our members began to query the "value for money" return on expenditure for broker services.
Concern focused on the lack of clarity over the extent of broker remuneration within the market and payments by insurers to brokers of "over-riders" and profit commissions.
It was felt that the practice where a broker may receive a payment from the insurer and a fee from the buyer called into question the principle of "best advice" for a customer and raised doubts over conflict of interest.
Amongst the Airmic membership, risk managers and insurance buyers began to question brokers' impartiality towards their customers. "Customer confidence" needed boosting.
Having previously approached brokers over the remuneration and transparency issue, in June last year, Airmic attempted to take that industry debate forward by announcing a proposed Code of Conduct for Lloyd's brokers.
Several brokers contacted Airmic to discuss the Code further and confirmed their support for the Airmic approach.
Ultimately, Aon Risk Services has introduced its own Code, developed in association with Airmic. Airmic applauds Aon's commitment to transparency, its belief that it is right for the customer, and therefore right for the market.
Airmic continues to stand ready and willing to discuss such initiatives with other brokers.
The law of agency
Under English common law, an agent is deemed "to stand in the shoes of his principal", that is to say an agent is not allowed to act on behalf of his principal without receiving his instructions or consent. It is essential that a broker obtains such consent otherwise many of his dealings on behalf of his principal will be contrary to the law of agency.
The key common law rules which apply to an agent are:
- the fiduciary duties of loyalty and trust owed by an agent to his principal prevent an agent putting himself in a position where his own interests are in conflict with those of his principal without him making a full disclosure to his principal.
- an agent may not use his position to acquire a benefit or " secret profit" from a third party.
- an agent may not act for both parties to a transaction unless he makes a full disclosure to his principal and secures his consent to do so.
- an agent must not enter a transaction where his interests may be in conflict with those of his principal without making a full disclosure to his principal and securing his consent to do so.
Fundamental Principles
Integrity :A broker should at all times conduct business with the utmost good faith and integrity.
Skill, Care and Diligence: A broker should act with due care, skill and diligence.
Market Conduct: A broker should observe high standards of conduct in all dealings and should take all reasonable steps to avoid causing harm to the standing or reputation of those markets in which it operates.
Conduct towards Clients: A broker should conduct the affairs of each of the clients for whom it acts in accordance with agency law.
Remuneration
A broker must disclose to his client the amount of brokerage and/or commission he receives on every debit note/invoice sent to his client: this should be broken down into its constituent parts. For those risks where there is a possibility that the broker may earn some commission at a later date, this must be disclosed to the client.
Inducements
A broker must take reasonable steps to ensure that neither it nor any of its employees either offers or gives, or solicits or accepts any inducements which are likely to conflict with any duties of the recipient or his employer, owed to clients.
Payment of commission to a third party
Third party commission should only be paid by a broker or someone who has rendered some service to the broker in relation to effecting a particular contract of insurance. Such commission should be part of the slip discount and should be commensurate with the work done by the recipient. Funds due to individuals should be remitted to their bank account in their own country.
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