The time has come for insurers to act.
I have never understood why the principal of high GWP justifies higher commissions.
When the underlying level of premium is not going up, the rationale just can’t be there. Insurers are in effect paying out good money from reserves to sponsor higher GWP without looking at themselves and questioning why or how much longer can it go on.
While rates are primarily set by re-insurers - and fortunately no major events have handicapped their well being - from the insurer's point of view such luck will not continue indefinitely.
The FSA appears to be ignorant of the dilemma, and rather than sort out the mess and stop the cross-subsidisation, has harked on about transparency of commissions as though that will address the matter.
In effect the FSA are handicapping via condoning the juggling of true costs of what an end customer should to pay. Some might say it’s a smart move as it suggests that prices are staying low, but that’s what they said about allowing the selling of sub-prime debt until the mess really hit the fan.
“Just as banks have won their argument on needs for extra solvency, so insurers must address the need to get more for risk.
The problem with our regulatory regime is it doesn’t understand what it is up against, and is blinded by self-interested large companies suggesting they know what is going on while the small ones don’t.
The right price is key, and just as banks have won their argument on needs for extra solvency, so insurers must address the need to get more for risk.
There can be no logic why a network or consolidator with a large GWP - and more than likely a loss ratio higher than a small firm - should be given a decimal pip more commission than it smaller competitors.
Let insurers prop up their provisions and solvency without cost to the tax payer, and let them tell networks who screw for more to go whistle! The game of hustle is up.
The problem to date has been whether the insurers have the courage to do just that in the light of the information they have seen year after year. I think now we are in a situation where they have no choice as they do not have the liquid funds to justify subsidising the loss ratios any more.
“Consolidators will have to do what small firms have done for years, cut back, cut the bull and most importantly reign in their overstretched debt.
What will this reality do to networks and their venture capital supporters? Very simply it will cause mayhem and blow their business plans away altogether.
With a finite customer base and no increase in commissions, consolidators will have to do what small firms have done for years, cut back, cut the bull and most importantly reign in their overstretched debt.
We can forget the front men running the show any more, these celebrities will be sidelined totally whilst their backers hack the respective businesses in place; a move that was always on the horizon but permanently delayed.
Now with insurers having no choice but to cut back on the large commissions paid, the moment is nigh and we can expect to see a new game in town.
Large lay offs across the board ‘reluctantly’ being announced and venture capital players, who want a maximum five year turn around on their investments, running for the exit because they have realised all to late that clients are fickle, renewal retention rates are not 100% and commission income in the new economic environment is not going up, however hard they hustle.
Robert D Marshall is Director of Trident Insurance.