As the campaign to abolish contingent commissions gathers strength, Caroline Jordan finds that the business of many regional brokers depends on them.
Commissions and inducements paid to brokers are under the spotlight as never before. As the Spitzer fall-out continues, the big regional brokers have said it is reviewing the way they are paid. There have also been complaints about a lack of clarity surrounding the FSA's rules.
Many small brokers are angry at being tarred with the Spitzer brush. They refute they are receiving backhanders - instead accusing insurers of favouring larger firms unfairly.
Almost all smaller brokers are remunerated solely by commission, which they receive in different ways. Insurers also reward them for hitting targets, having accounts with low loss ratios and for volume. This can create an opaque income stream. Some brokers may well be giving an insurer more than its fair share to hit these targets - this is something for the FSA to investigate.
But, in the real world, the vast majority of these brokers are not creaming off huge sums of money. Contingent commissions are under pressure, but most brokers that receive them in the provincial market say such hand-outs allow them to earn a living.
What brokers think
Glyn Rowett, Rowett Insurance Brokers, St Austell
"I want to see a level playing field in terms of commissions paid. The market is becoming increasingly dominated by big alliances, and brokers within these are receiving higher commissions for selling the same products.
"For a commercial risk some big players receive around 40%, while we are paid 20%. But this does not mean a client using an alliance will receive a better service.
"We want to remain truly independent, but as a result of pressures on commission we may have to join an alliance. Commissions are being squeezed and insurers constantly want more business.
"I think all insurers will err on the side of caution as far as inducements are concerned. On the life side, providers have stopped most entertaining and it's being also scaled down by general insurers.
"We are increasing our amount of fee business. It leads to greater transparency, but this is not what all clients want. Disclosure is not the main issue for many clients; they want good service and a fair price first. Grey areas remain in this area - we need greater clarity."
Ian Mantel, Manor Insurance, Hastings
"A lot of nonsense has been spoken comparing Spitzer's investigations to the situation in the UK. Some press coverage has just been about scaring the pants off brokers.
"Clients don't want to know what brokers earn and many are fed up of being bombarded with information. Many brokers take a small commission on premium finance, for example, and I don't think clients are interested.
"To suggest many smaller provincial brokers are being paid too much commission is ridiculous. Brokers themselves have been responsible for driving rates down. About 10 years ago insurers such as Provident paid 15% commissions. Now 7.5% is common.
"We have strict rules on client money and deal only with insurers that have risk transfer. But regulation is not necessarily leading to better client service. The cost could impact on whether we take on a new member of staff. We have recently introduced a £5 policy administration fee, but this still does not cover the costs incurred on us by regulation."
Duncan Macbeth, Macbeth Scott & Co, Kendal
"Spitzer is now becoming a bit boring. You cannot compare the activities of the large national brokers with small provincials.
"There are a few slippery Joes out there, but many brokers treat their clients fairly and do not rake in massive sums. In recent years commissions have fallen - particularly in liability - impacting on firms' turnovers and profits.
"Insurers often pay brokers more based on volume and performance - growth and profitability deals are commonplace. If your loss ratio is good and you hit a target you might receive a welcome payment. If an insurer received say £1m in business, a broker could be paid around 5% or £50,000.
"Provided there is proper transparency it is not a problem - we are all in business to make money. The client should always know what is going on though and, likewise, insurers need to be clear in their terms of business with brokers. These vary - I was recently pleased to see a form from AXA which was particularly clear."
Paul Dickson, Dickson Insurance Brokers, Watford
"It looks as if the momentum to shut down contingent commissions is unstoppable. But why should we rush into this before alternative forms of remuneration are available?
"We should also gauge whether contingent agreements actually work against customers' interests, as opposed to whether they fundamentally corrupt market practice.
"One truly unhelpful feature of our business is the uniform pricing of business by insurers to brokers. Broker A often gets the same price for policy A as broker B, regardless of volume or superior logistical factors. Brokers should get a better rate for doing better business - whether they are large or small.
"Contingent agreements represent how the market has evolved to distinguish broker differences. Why shouldn't broker A obtain extra income for contributing extra profit to the insurer? And how does the client lose out? It could have bought the same policy from broker B, got a bad service and instead went with broker A and loved it.
"There are many examples of conflicts in business that are effectively managed, for example rating agencies that are paid by the firms they assess for financial strength.
"Why can't we manage the conflict, as opposed to heading for level pricing and the inevitable erosion of earnings, structural inefficiencies and lack of competitiveness that would follow?" IT