Remuneration in the spotlight as insurers seek ways to cut cost

As insurers put high commissions under review in a bid to trim payments, Oval chief executive Philip Hodson has warned that brokers are suffering enough already.

Allianz and AXA are to review commission payments, while RSA is likely to take a “wait and see” approach and Zurich and Aviva say they will not take action.

Hodson said both insurers and brokers were suffering with the soft market, but stressed: “Insurers’ balance sheets are much stronger. Each year they still have the pre-releases from their claims reserving.

“The brokers are the ones that are really struggling. Look at most brokers’ profit and loss accounts and they are very weak.”

Any likely action will affect the consolidators – Giles, Oval and Towergate – as well as other broker relationships where commissions are deemed too high, such as with property owners.

Insurers are determined to trim commission payments, but on an account-by-account basis linked to profitability.

They have introduced differential pricing favouring brokers that charge lower commissions.

AXA commercial lines chief executive Amanda Blanc said: “I am constantly reviewing the profitability of all key accounts to see whether it works for us or not.”

Allianz Commercial boss Chris Hanks said: “At a time when we are not getting the rate strength we need, we are looking at other ways to keep our costs down and our prices competitive. One of the ways is to review all sorts of outgoings, including commissions. I’m much happier paying commission where there is profit than I am where there is lack of certainty of profit.”

Meanwhile, Zurich commercial broker manging director Dave Smith said the insurer had always been cautious on commission payments. “The commissions we have put in place are fairly long-term arrangements and we happy that they are sustainable,” he said.

And Aviva director of trading Phil Bayles said commissions had been reduced two years ago under former chief executive Igal Mayer.

He said: “We are broadly happy with the commissions. We took action when we needed to two years ago, so from our perspective it is steady as it goes.”

A more gradual option for insurers may be to reduce commission payments by a couple of percentage points over the next two years, which might also appeal to brokers.

Despite the downturn flatlining broker revenues, consolidators are still making good margins on broking. An analysis of Towergate’s accounts by independent analyst Equity Development, looking at operating profit to operating cost, shows a retail broking margin on cost of 42%, an underwriting agencies margin of 103% and a mortgage broking solutions margin of 216%.

Insurers could also build relationships with independent brokers charging lower commissions to realign the distribution flow.

Aviva lost nearly £1bn in premium from Mayer’s actions but has been growing its book through independents, reducing capacity to consolidator managing general agencies and trimming high-commission accounts. This led to a combined operating ratio of 97% in 2010.

But Aviva has 29 UK branches working with 3,000 brokers, so replicating the independent route could be a challenge for rivals.

For insurers that lack such a support network, the consolidators continue to deliver high volumes of SME business with similar loss ratios to the independents and nationals.

But one source said: “You cannot pay 40% or 45% commission on SME business and have that for the long term. It was always going to come down by a bit. It was just a question of how much and when.”