Mazars head of insurance and London senior partner Robin Oakes specialises in the broker market. He writes candidly about how the New York attorney general's lawsuit against Marsh & McLennan could impact the UK market.
A universal suspicion appears to pervade today's business world.
As soon as Company ‘A' is accused of unethical practice, Company ‘B' is immediately tarred with the same brush. Such suspicion is not, it should be noted, without good reason.
Recent financial scandals have severely dented worldwide business confidence and show no signs of abating. It was only a matter of time before attention turned to the insurance sector.
Eliot Spitzer's accusations of market ‘steering' in the form of morally questionable Placement Service Agreements (PSA's) and market ‘subversion' through broker collusion and ‘bid rigging' have rocked the US insurance industry.
Yet how worried should we be in the UK? Is the Spitzer case merely the tip of a rather ugly global iceberg?
Speaking to a number of London-based underwriters it seems clear that PSA's are a fact of life – it would be naïve to suggest otherwise. Several have told me that many brokers –Marsh included – REQUIRE incentive arrangements to show them business. It's no surprise then that Marsh allegedly increased revenues in this way by $845m last year alone.
PSA's create a conflict of interest for the broker and so are worthy of regulatory attention.
However, London market brokers typically provide a significant number of services above and beyond the basic placement of cover and need to be remunerated for these services. If PSA's are banned, something which will be very difficult to police, then brokers will need to seek alternative forms of remuneration.
A simple and more effective solution is disclosure. Arming clients with details of their brokers' financial arrangements with different underwriters will allow a more informed purchase and go along way to mitigating the effect of any conflict of interest.
The real concern for many in the UK is the possibility that bid rigging is prevalent in our market. I do not share this fear.
The London Market system of subscription would make it extremely difficult to fix a bid, as such an action would require collusion with a whole host of disparate players.
So, should the London market be worried by developments across the pond? To a point, yes.
It's inevitable that certain businesses will need to change the way they conduct themselves but there's little need for collective hysteria. Rather this provides an opportunity to refocus procedures to the benefit of all parties in the insurance business including clients.
Indeed, the silver lining is significant, with many mid-tier firms rubbing their hands in expectation of business and producers falling from the Big Three.
The Spitzer scandal is of a magnitude that will doubtless warrant consideration from the FSA – indeed I am sure it is looking into these issues already. For many though it will simply be a case of business as usual.
