There could be an alternative way to deal with premiums over £10K that would not need the 5% solvency margin for premiums taken by brokers.
The FSA could insist that all such premiums should in future be funded through insurers by arrangement with the usual finance houses.
Brokers would simply get the agreement completed and pass it on to insurers who would hold the financed funds to await policy issue. The insurers would then forward commission after receiving the full amount and deducting their own share.
This would remove the temptation brokers to regard large sums, held in their client account, as working capital.
I agree with the FSA proposal that insurers should guarantee premiums in the event of a broker failing. Surely this is consumer protection at its best? Any other idea (such as compensation funds) just adds cost and complexity. Perhaps it would also concentrate the minds of insurers more on who they do business with. It might have made a difference in the Ward Evans fiasco.
I'm not sure if imposing tough solvency margins on brokers would make much difference - it doesn't sound as though it would have prevented Ward Evans from failing, and regulation doesn't seem to have done much for the policyholders of Independent or Equitable Life.
But a few stiff jail terms for the directors of failed companies might make a difference.
If insurers had to guarantee premiums it might make them pay more attention to exactly what methods are being used by certain brokers to provide them with the support they value so much. Many insurers seem to be oblivious to - or don't care - that some intermediaries believe they can work for nothing.
It's becoming a familiar cycle ... broker rebates commissions in order to grow. Insurer rewards growth with better deals/cheaper rates. More growth. Income for broker doesn't keep up with expense, you don't need to be an FSA compliance officer to guess what happens next.
It's simple - you can't work for nothing. Insurers shouldn't look to do business with those that operate on that basis. And if they do, they should pay the penalty.
The problem is everyone else will pay because insurers faced with this imposition will no doubt put in place draconian rules, which will apply to all intermediaries rather than simply carefully select who they do business with.
Johnstone Insurance Services
How would this be calculated? Would it be 5% of annual total of all premiums over £10,000, or just those outstanding to insurers at any one time? Would premiums collected by insurers direct be included?
I suggest most brokers would struggle or fail. The average income on premiums is falling, particularly on larger cases where a fee takes account of "economies of scale". It appears to be a total waste of working capital normally used for investment in IT or training or set aside for possible acquisition. How do you progress without cash? Do you borrow money in over-ambitious expansion plans and put clients at risk with solvency problems?
Your article on the possibility of an FSA-imposed solvency margin on brokers makes interesting reading.
While a valid subject for debate, surely it is a non-issue, or am I naively assuming this is another example of some brokers playing by different rules to others?
Is not the point of an IBA Trust account for premiums to avoid the very problems that are now being raised, or do I operate differently to the brokers who are complaining about the FSA proposal?
Received premiums go into the Trust account and are ring-fenced for the benefit of the insurer. Premiums that have not been received are still owed by the insured, our client. If we go bust, the insurer is free to collect that premium or cancel the cover.
If I do not run my Trust account properly, most insurers have the personal guarantees of the directors. Furthermore, I should think we run the risk of a custodial sentence if by our actions the collected premium is not available for the insurers when requested.
Just how much more complicated does it have to get?
Richard Weston and Special Insurance Schemes Agency