Brokers must put their house in order before the FSA does it for them, says John Jackson
The growing tendency towards a chain of brokers being involved between client and insurer is leading to serious problems that the industry must wake up to and take action now to stamp out.
When a client places business with his own broker - the producing broker - he in turn will often give it to a second broker, who places it with the insurer. That
placing broker is then the agent of the insurer. No problems there - indeed, the client is receiving choice. The brokers are working together to achieve the common good.
Even involving a third broker in the chain does not seem untoward. But what happens when a dozen brokers get in on the act and the original risk is changed to conform to the requirements of the underwriter? Loss of control and a recipe for potential disaster.
The broking fraternity must clean up their own house in this regard - or the FSA will step in and do it for them. That would mean heavy-handed regulation and more cost to the broker.
There has to be complete transparency in any contract of insurance, with the insured made aware of which insurer is underwriting his risk. The simple arithmetic is that for every broker in the chain there is an extra mouth to feed - in other words, increased costs.
This "chain gang" means of placing risks must be stopped. But such is the difficulty in placing many risks, that clients and their producing broker are often forced into desperate measures. Such is the highly charged insurance market of today.
The paper chase between insured and insurer needs only one broker in the chain to fall down and the whole pack of cards can collapse. It is not something that is new - it has been going on for years.
It is only because of the difficulties of placing particular risks - employers' liability (EL) is a good example, professional indemnity (PI) another - that the problem has taken on wider implications.
It is now time for the broking fraternity to grasp the nettle on this one and clean up its own Augean stable. Doing nothing, as the saying goes, is not an option.
This leads me on to another point: grossing up. English is a rich language, but in simple terms you can substitute "rip-off" for "grossing up". Any hidden cost is both unethical and unprofessional. Again, it is not something that has just surfaced - it is yet another problem that has been around the market for years.
That is why the Lloyd's initiative in recommending full commission disclosure in its submission to the FSA's consultation on sales of general insurance products (CP160) is very welcome.
Moreover, with commission disclosure, I am prepared to bet many brokers would soon change their invoices from "commission" to read "fees". One small step for man...