Tony Cornell looks at why registered brokers should be highly satisfied with the content of the second consultation document from the General Insurance Standards Council.
When the full implications of the latest consultation document from GISC sinks in, registered brokers may need to pinch themselves to see if they are dreaming.
At last, they appear to be in sight of achieving what they have been campaigning for since statutory regulation was introduced in 1967: a level playing field for all intermediaries selling general insurance with the code of conduct broadly based on their own IBRC code backed by assurances that insurers will only deal with regulated intermediaries.
Entry into the new regime will virtually be automatic for registered brokers. The brokers on the board of GISC have done an outstanding job protecting their interests and the whole board needs to be congratulated on producing a balanced and well thought through solution which produces a viable framework for general insurance regulation in the 21st century.
Brokers are well placed
Sure, there are drawbacks for brokers. They will be subject to independent monitoring and the costs of self regulation will be higher. The code will be enforced more rigorously by an independent organisation and the costs of a disputes resolution service still needs to be determined. Overall, however, this is a small price to pay for a virtual monopoly on the £16bn UK premium income which passes through insurance intermediaries.
Current brokers will be ideally placed to lead the resultant consolidation and take advantage of the inevitable fallout.
There are many implications for the industry arising out of the document and these will result in the biggest structural change ever seen in its 400-year history.
The scope of the rule book applies to every person who sells insurance and regards themselves as fully responsible for service to its customers or has agencies with more than one insurer for any particular line of business. This will need a great deal of further interpretation but does seem to mean the end of tied and company agency status, except for those agents who act as introducers only for one insurer. Everyone else will need to meet the GISC membership requirements. Many will be unable or unwilling to do so, opening up new opportunities for brokers and restricting potential new entrants.
Sub agents who advise on insurance will need to be members of GISC. This closes the loophole where there was very little control of sub agents, especially those operating on behalf of brokers. This rule has huge implications for point of sale transactions and the bundling of insurance for other products and services.
Where does this leave free insurance sold by motor manufacturers, warranty and creditor insurance sold by retailers and lenders, travel insurance sold by agents, all those non-insurance companies seeking to stretch their brand into general insurance products and the many part timers who dabble in insurance?
The industry will need to change dramatically to ensure any vacuum created is filled and new methods of selling insurance are not strangled at birth.
One area which will have a large impact is the competence and training requirements for membership. The training industry will have a field day!
Every person who sells insurance face to face will need to have reached a measurable minimal level of competence by 2003. The only exceptions are brokers or independent intermediaries who have been subject to the ABI code. Brokers get in automatically, others need to have been in the industry for five years. There needs to be clarification on the position of all employees of those organisations and of insurers.
The lowest level of competence for members applies to staff of a non-insurance intermediary selling, but not advising on, insurance products such as travel, warranty and so on. These must have an NVQ in customer service or their own professional area with an insurance module! How many retailing staff have this?
Call centre staff working for members will need an NVQ, including an Insurance Foundation Certificate and a customer service module. Once again, how many staff in the insurance industry have achieved this level?
There are many other levels of competency requirements and this whole area will have an enormous effect on the industry. On the one hand it will raise standards, on the other, it may stifle creativity and expansion and takes no account of modern point of sale computerised training aids. This area will be subject to more consultation.
The financial requirements follow the IBRC rules but bring them up to date. These should cause no problems with registered brokers but will impact upon other intermediaries who have chosen not to register in the past.
The key features of minimum professional indemnity levels, watertight segregation of clients premiums and minimum solvency levels all seem sensible.
One big change is the treatment of assets. These are now determined by UK standards of accounting practice. This suggests that provided goodwill is written down correctly, it can now be treated as an asset for solvency margin purposes. This is great news and will enable brokers to make acquisitions without the absurd situation of membership being threatened.
The actual code of conduct is memorable for what is not in it. There is no mention of limits of business with one insurer. This seems sensible with the ongoing insurer consolidation. Tying on the life side is no longer a bar to independence, this is now seen as irrelevant.
Declaration of the status of members to customers is important and the customer must be informed of the degree of choice in the products the member can offer. All members must avoid conflicts of interest. Potential conflicts are not identified but EU regulation hovers and this area could be dynamite.
The IBRC has never really enforced its code of contact proactively and have mainly reacted to complaints about their members. The industry is aware that lip service is being paid to these rules and an independent regulator with monitoring powers will change this. Brokers may need to examine their processes to see if they comply.
GISC levy on intermediaries is based upon total commission and fee income. There is no alleviation for payments to sub brokers. This seems unfair and will need to be challenged.
Keeping the name
The document suggests the term "insurance broker" may be retained for those who can show independence and act solely on behalf of the customer. This does seem a sop to existing brokers and one wonders about its merits. Broking is an outdated term suggesting the role is to seek the lowest price. It has never meant anything to the public and indeed many brokers are dropping the term reflecting the current role of "managing risk". It does not seem to make senses to have another tier of self regulation which will confuse the customer with no apparent benefit but to satisfy egos.
Efforts will be more effectively spent on making the new rules work.
It is disappointing that the document makes no mention at all about trading in an E-Commerce environment and this is something that needs to be considered if this channel of sale is to grow.
Overall, there is still a great deal of work to be done sorting out the detail but the document is an excellent step forward and lays the foundations to establishing what those in the insurance industry would like. A high standard of professionalism, a chance to win back public confidence and an industry in which we can all be proud to work.
Tony Cornell can be contacted by e mail at firstname.lastname@example.org