With many insurers beginning to investigate and question the level of brokers' commission Caroline Jordan reports on the implications for both insurers and the wider broker community
Recent weeks have seen AXA's and Norwich Union's top executives question whether brokers' commission levels need to be cut.
The pronouncements look set to plunge some insurers into a battle with the UK's top brokers who may now be questioning whether the gravy train is about to come off the rails.
If insurers are to start reneging on commission deals that they agreed in the first place, there could be more than a few heated conversations going on.
As the broker market has consolidated and become more powerful, insurers have agreed to deals where sums of around 40% or higher are thought to be paid out.
But insurer revenue is falling because of the soft market and paying out so much to brokers is affecting profits. Not only that, but if the FSA imposes compulsory commission disclosure, huge commission payments will not show the insurance industry in a good light; brokers risk being seen as greedy and insurers irresponsible for agreeing to pay them.
Large commission payments without justification could make a mockery of the FSA's principle to treat customers fairly.
Royal & SunAlliance (R&SA) chief executive Bridget McIntyre has refused to be drawn on whether commission levels are too high. But the insurer is understood to have a working party looking at this area. In terms of whether rates should be disclosed, it is believed that R&SA sees this as a matter largely for brokers, but it does want to ensure it is fully up to speed on matters and acting responsibly, sources say.
This is not new territory for Zurich. The insurer has been involved in stand offs in the past with Towergate – one of the brokers believed to be well remunerated.
David Smith, managing director of Zurich's broker division, comments: "Commissions paid by some insurers have risen over the past three years at a greater pace than we have seen before. Insurance companies have never been very good at saying no – it often seems that there's a sudden rush of blood to the head when growth is mentioned or that a fear of exclusion drives behaviour, rather than logic or objectivity."
He says that commission levels must be sustainable if insurers are to provide certainty for customers and brokers, but adds: "The issues of disclosure and payment by fee should not have to be driven by regulation. A healthy and diverse market should offer both options."
It would seem most insurers want to be able to keep individual deals with brokers, but rein in those deals where huge levels have been agreed. It certainly will not be easy.
Yet, they also emphasise that where the broker is providing extra services, for example, with a delegated authority scheme or perhaps where claims handling is offered, then a higher commission is totally justified.
Cathie Bruce, distribution and customer service director for Groupama, comments: "An element of work transfer merits higher commission. When the market hardens, we will probably see commissions fall."
She adds that in some instances, commissions being paid by some insurers "are higher than I've ever been aware of," which is precipitating action. "We would not participate in deals like this and it is particularly relevant with the FSA's close focus on treating customers fairly."
Smaller brokers' angered
Meanwhile, high commission is not just rankling insurers. Many smaller brokers are also angered by what they see as ludicrous sums being paid to brokers that are not providing any real value.
Ian Mantel, managing director of Manor Insurance, says: "Where there are excessive commissions being paid for no extra work, this can hardly be treating customers fairly. I think the regulator should come down like a ton of bricks on these practices."
He says that, typically, a smaller broker would often receive around 20% or less for a commercial commission which could be less than half of that received by a mega broker.
He adds that he, too, does not want to see more regulation imposed, particularly on brokers, but points out: "We need a more sensible approach from insurers, perhaps some type of voluntary code.
"This would not mean standardisation, but insurers looking to work together. I would call on them to be brave enough to cut commission if necessary – they have done this in the past for smaller brokers. At the moment it is the tail wagging the dog."
Moorhouse Group is a larger provincial broker. Its chief executive, Lyndon Wood, says the current debate is to be expected and comments: "Any business should look to maximise profits, insurers are no different. The discussions over the past 12 months or so included commission disclosure and so the opportunity has therefore arisen for insurers to bring the subject up of the level of commissions paid."
He argues there is no problem in individual deals providing they are reasonable. "I see a profit-share based on loss ratio as acceptable. This provides both parties the opportunity to work closer to provide a better product and better service, based solely on profitability of the account rather than volume of business."
And longer term, Wood says Moorhouse is looking at a fee-based structure, largely as it is a better way of predicting income across the board. "Accountants and lawyers have been doing this since year dot. We are a professional industry and I can see that adopting a fee structure may even raise the industry's profile a little in terms of professionalism."
If insurers have the courage to cut commissions, this will not only lead to greater parity with smaller brokers, it could also be good news for underwriting agencies, which tend to have flatter commission structures.
Ian Russell, underwriting director for Anglo Pacific, says: "These announcements from the major insurers are not surprising. My feeling is someone in a senior role has seen results coming in which are less favourable and paying crazy commissions won't be helping ?– you can't give away all your profits like this."
He adds while underwriting agencies may not be paying the big headline rates, they can be more flexible, offer quotes far quicker and provide better service which is why they appeal to many smaller regional brokers. "If the package is right then there may not be much in it, in terms or commission. We will also come to arrangements where we will pay more to a broker based on what they are doing – perhaps through visiting their clients and providing physical inspections."
He adds: "I would like to ask some of these brokers what they are doing to earn 40%. Reward must be proportional."
This appears to be the message coming out from the insurers and smaller brokers ?– time will tell if the big insurers in the driving seat will take this on board and bring that train screeching to a halt. IT