Robin Wood examinesa particular aspect of the EU's Insurance Mediation Directive which relates to a broker's financial capacity
It is very tempting to turn off when the words "European Directive" appear . But the following article covers a subject that no one working in the industry should ignore.
In 2000 the Commission set out its proposal to establish a system of registration for all insurance or reinsurance intermediaries based on the following professional requirements:
In principle this is no different to the GISC matrix of regulation. But in this article I want to look at the last item in particular.
On 19 March 2002 the Insurance Mediation Directive was adopted. You must be absolutely clear that this article is not about what will happen in the UK. That depends on what the Treasury and FSA have to say.
The purpose of this article is to increase awareness of some of the issues that might arise, in particular from the last bullet point above.
Article 4 paragraph 4 of the Directive says: "Member states shall take all necessary measures to protect customers against the inability of the insurance intermediary to transfer the premium to the insurance undertaking or to transfer the amount of claim or return premium to the insured."
The Directive says the measures should take any one or more of the following form:
(a) provisions laid down by law or contract whereby monies paid by the customer to the intermediary are treated as having been paid to the undertaking, whereas monies paid by the undertaking to the intermediary are not treated as having been paid to the customer until the customer actually receives them
(b) a requirement for insurance intermediaries to have financial capacity amounting, on a permanent basis, to 4% of the sum of annual premiums received, subject to a minimum of E15,000 (£9,400)
(c) a requirement that customers' monies shall be transferred via strictly segregated client accounts and that these accounts shall not be used to reimburse other creditors in the event of bankruptcy
(d) a requirement that a guarantee fund be set up.
It is interesting to note the wording "any one or more". At RW Associates we take a risk management approach to compliance generally and training and competence, so in addressing these requirements we have a range of possibilities.
One of these is that the UK will require all four to be met at one end of the scale. At the other end is that it will be one of four. More likely it will be something in the middle.
Option (a) is perhaps best left to the lawyers to sort out. It is fairly straightforward, but is not in line with current market practice.
Option (b) creates the first shudder among our readers, I suspect.
Taken literally, each year a broker must have sufficient solvency to exceed (by £1) premium (not commission) throughput on a permanent (day-by-day) basis.
So, a broker moving £20m of premiums at 10% commission will have to demonstrate a solvency margin of 40% of annual commissions or £800,000.
However, recognising that, the first question to address is "could a broker afford or achieve such a solvency margin?", the second is to read option (b) carefully and recognise that if premiums go direct to the insurer, the solvency requirement is removed.
Under option (b), therefore, the risk ranges from finding a 4% solvency margin to losing the benefit of premiums getting to the insurer via the broker. Could a broker actually save money by not having to collect premiums?
It is perhaps fair that a regulator should be concerned that a relatively small business concern in many cases is handling so much of someone else's money. Which leads to the third option:
Option (c) leads to the other alternative of the insurance broking or client account. But in its current form is that enough security for the regulators, or for the public for that matter?
The signatories to that account are often officers of the regulated firm and one would have to suggest that "trust status" of the account is a minimum. Trust status creates a criminal act if the funds are misused.
Take a little time to consider how option (c) still presents a risk to the public if regulated in its current form and then consider how option (c) and (a) might be linked.
Option (d) seems to mean that there is a fund to guarantee that the public cannot lose their money. Historically, would have to be funded by practitioners.
Ask yourselves a question. If you were a member of a club with a membership fee of £500 per year, but had to top that up each year to make up for the sums that members had misappropriated, would you want to be a member of that club?
I think I might join that club if there were good systems in place to prevent nefarious members misusing funds in the first place.
So, let us all, as part of this week's CPD, do a bit of crystal ball-gazing.
Let us assume that the Treasury and FSA recognise (hypothetically at present) that the key risk management objective is to ensure that the public does not suffer by the misappropriation or misuse of their premiums in the distribution chain without sufficient demonstrable funds somewhere to make up the deficiency, if it occurs.
The exercise this week is to write down, probably in bulletpoint style, the effect on a broker if:
Remember that the object of the exercise is to increase knowledge about what is in the Directive and not to second-guess how the Treasury and FSA might address the requirements.
Visit the EU website at: http://europa.eu.int/comm/internal_market/en/finances/insur/docs/05462-r1-02_en.pdf.
Using this CPD page
For the vast majority of practitioners and indeed support and supervisory staff in our industry, CPD is about regular learning and study that is planned, recorded, timed and evaluated.
If you are a member of a professional body with a CPD requirement then there will be certain rules regarding the quality and nature of study material, and the way in which it is recorded.
For staff of GISC members this means recording on your individual training file what the learning was, who provided it and when.
It might be structured, such as a course, a learning programme or exam study. But it can be unstructured. This form of study encompasses reading the trade press, technical material or taking part in activities to support your professional body.
Some CPD requirements are points related (a little antiquated) and others require a time value to be allocated.
For example, it might take one hour to read Insurance Times each week. Most of that could be put as a time value but, in reality, perhaps only an half hour was devoted to learning something. The rule is to be honest with yourself and record the time that is relevant.
Always take time to make a note of what you felt you gained from the activity. This is useful information for anyone else considering the same activity.
In response to the popularity of our CPD programme each week's CPD page can now be downloaded from our website. We will be preparing a binder for you to keep these in alongside the results of the exercises.
To download a PDF of this article as it appears in the magazine click here .
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