Can brokers always put their clients first, or are they just in the hands of the insurersNULL Chris Wheal reports.
When would-be policyholders approach a broker to oversee their insurance matters, they expect at the least an impartial recommendation and at best a trawl of the market in pursuit of the best quote. But as club relationships with insurers grow, the question is: do brokers put their clients first or are they at the mercy of insurers NULL
Frances Harrison, the insurance expert at the National Consumer Council, has several concerns. "One of the issues is this requirement for intermediaries to declare whether they are tied, multi-tied or independent but the fact is this is meaningless as an independent could still only be dealing with one insurer," she says.
Alan Gavaghan, deputy chairman of Willis and chairman of the Insurance Broker Registration Council, points out that registered brokers have to declare and explain if they place more than 15% with a single insurer. Yet, as Harrison points out: "The IBRC might look quite good on paper but what happens when an insurer has more than 15%NULL Often nothing. The PriceWaterhouseCoopers monitoring for the ABI looks at the issue and it is vastly more expensive than the IBRC and takes action. I'm really not confident that the IBRC has achieved that much."
And she has more to say. "We have been told by a health insurer that when they introduce a hike in commission rates they get a significant increase in market share. This is with no change in premium or policy wordings. If you are acting on behalf of the consumer then the commission rate shouldn't make a difference," Harrison argues.
Stuart Cliffe, chief executive of the National Association of Insurance Customers, has other worries too. "We have been asked by a couple of larger broking chains to become their commercial ombudsman to arbitrate over disputed claims. The brokers say to us that they may agree with a client but if they argue with the underwriter, the underwriter will threaten to withdraw the broker's agency agreement," he says.
Institute of Insurance Brokers director Andrew Paddick has never heard of this, but admits knowing of cases where brokers have encouraged claimants to sue insurers for non-payment of claims and have had their agencies withdrawn after the clients have won.
But it needn't even be as obvious as withdrawing agencies. Many insurers have exclusive club deals with brokers, offering special deals on marketing, consultancy, training and research, not to mention days at the races and weekend hospitality jaunts. The aptly named Independent Insurance deals with 1,100 brokers but has a club of 200 favourites who provide it with 80% of its business.
AIRMIC's concerns
Commercial consumers have complaints too. The Association of Insurance and Risk Managers (AIRMIC) has been banging its drum about overriders, double-dipping or backhanders for a couple of years now. When commercial customers agree to pay a broker a fee for the work done, so that the broker receives no commission, they express alarm to then discover the broker receives annual payments based not on individual bits of business but on total volumes. This means the broker is, after all, getting commission on the contracts they place. Was this commission affecting the broker's recommendationNULL
One man who should be able to put an end to this squabbling is Tony Cornell, the man retiring after what seems like a lifetime in charge of broker relations for Commercial Union and now CGU. He dealt with the CU Club Elite, which he admits paid better commission to club members than non-club members. Also he has recently run the old General Accident schemes, such as Planet, in which CGU actually puts its own staff in the broker's offices to take over personal lines business direct at discounted rates, without the broker seeking quotes elsewhere.
"They're not independent. Nobody's independent. But does it matter? Tesco and Sainsbury's aren't independent but nobody seems to mind," he says. And Cornell insists it is not good guy intermediaries suffering at the hands of bad guy insurers. "Some insurers are buying up intermediaries. Swinton has been bought by RSA and Hill House Hammond is owned by Norwich Union. But personal lines brokers in the past have said 'I'm not going to deal with an insurer that can't support full-cycle EDI', and that's not necessarily in the best interest of the consumer. Others said only those insurers paying a certain level of commission would get on their panel," he says.
Brokers' defence
There are plenty who line up to defend the brokers. Mike Williams, chief executive of the British Insurance Brokers Association, is still exasperated that brokers' independence is being questioned. "It is nonsense. Life is made easier for people who call themselves insurance brokers because they are regulated by law about what they can and cannot do and the primary concern of the code of conduct is that they have to put the client first and declare any interests," he says.
"AIRMIC's attacks are just attempts to squeeze the industry further. Most AIRMIC members have worked in insurance or broking before and have known about the payments they now pretend to be alarmed about for years - many of them used to pay or receive them. And AIRMIC has been unable to come up with a single example of where the payments made a difference to the broker's behaviour or the premium paid."
Club deals make straightforward business sense and the equivalent, bulk buying, is normal business practice. Williams adds: "A survey of 1,000 brokers and intermediaries found the average number of active agencies was nine. I was a broker for 25 years and we used to deal with perhaps 30 of the 400 insurers there were then but 90% of our business went to eight or nine of them. Having leverage, or market share, is the best way of getting the best deal for the client. Bulk business and buying power discounts are the way business works."
He also points out that by securing discount deals through schemes or clubs, the broker cuts its costs. Trawling all available insurers for a quote and comparing all the policy wordings and exclusions for each and every customer would take time and cost money - and the client would end up paying more.
But being unable to call on the whole market is a point the direct writers leap on. "They don't have access to the direct writers so to claim that they offer consumers the best deal on the market is not valid," says Direct Line. But Williams is backed by Aon's Anthony Howland Jackson, chairman of the board of the proposed new regulator, the General Insurance Standards Council and chairman of the Lloyd's Insurance Brokers Committee. "The broker is doing the right thing because he is enabling himself to get the discounts. These are valid in any other business so why not insurance?" he says. Direct writers can only discount because they cherry pick the safest and easiest to underwrite risks.
Howland Jackson dismisses AIRMIC too but says more transparency will wipe out its argument - Aon recently agreed a code of openness with AIRMIC - and he says GISC will force those intermediaries who are really tied agents to become truly independent or give up the ghost.
Independent or tied?
Insurers are also on hand to defend intermediary independence. NU insists Hill House Hammond has a totally free hand and HHH even claims it is denied certain lines of business by NU.
Independent's marketing manager, Graeme Sutton, insists his select brokers are chosen because they are the best. They get no different commission rates but may get more favourable quotes because the underwriters know they can trust the broker's judgement and they present the risks better.
Mike Slack, of the Association of Insurance Intermediaries and Brokers, points out that nobody can possibly remember all the different commission rates and deals for each insurer they have agencies with. "We look for the policy wording and the claims record and then the premium," he says. He also points out that some specialist intermediaries can only deal with a few insurers anyway. Slack's firm has just three agency agreements with a range of exclusive schemes.
Andrew Paddick takes up this point. He has long joked that the Association of British Insurers will soon be the Association of Both Insurers but he says that will not matter. "Even if there are only two insurers, if a broker is choosing between the two he is still independent," he says. "Brokers are as independent as the market allows them to be. Very few brokers deal with the entire market because insurers don't want to deal with people who only put one policy their way a year."
And legislating against that would backfire on the brokers who don't want to deal with some insurers because they suspect their claims handling or have negotiated better deals with rivals. "When a broker recommends a scheme of his own it should only be because it gives the client the best deal," Paddick says.
Clubs too are fine, but Paddick does have concerns about insurers insisting brokers put a fixed amount of business their way in a given year. "If the broker gets to October and he's still short of his target, it puts pressure on him to put business that way that could have gone elsewhere," he says. Paddick would like such clauses outlawed.
The NCC has ideas too of what could be done to help. Regulating claims is one. If claims were regulated to the same level that the PWC monitoring unit is doing for sales, insurers would be under a lot more pressure to pay up. Any broker then challenging an insurer on behalf of a client would be able to rebut any threats of cancelled agencies by referring the insurer to the regulator. And more openness, especially about commission rates, would help.
But has the question been answered? Are brokers and intermediaries truly independent? Freddie Hospidales of the Chartered Insurance Institute says the whole industry should be based on everyone being ethical but even he sits on the fence with "you have to say yes and you have to say no".
In reality, the answer is a qualified 'Yes' but the qualification is Orwellian. They are independent but some are more independent than others.
