The disclosure of commission is rapidly becoming the most controversial topic in intermediary regulation. It is understood that unless the insurance industry does something to stop it, new intermediar ...

The disclosure of commission is rapidly becoming the most controversial topic in intermediary regulation. It is understood that unless the insurance industry does something to stop it, new intermediary regulations will include requirements for commission to be disclosed to clients.

The Association of British Insurers is conducting a survey on commission disclosure. Reading between the lines, it hopes that the survey will protect the position of insurers. They are said to regularly pay travel agents and other intermediaries commissions exceeding 40% - a rate that consumers would not tolerate. Many brokers are opposed to disclosing their commission. A few, however, already use fees and see this as a way of equating their status with other fee-earning professionals.

At the end of May, John Jackson wrote a column in Insurance Times that sparked a heated exchange of letters with The Broker Network managing director Grant Ellis. This is what they said . . .

Dear John,
You suggest that in the 21st century commission is an anachronism, and ask whether brokers see themselves as giving professional advice, or selling a product. You seem to be suggesting that both are mutually exclusive. I don't believe they are, and here's why.

Insurance brokers purvey a number of services:

  • Advice
  • Product sales
  • Policy administration
  • Claims administration and assistance

    Some of these may very well lend themselves to fee-based remuneration, but not all, and certainly not for all customers. Time after time I hear that age-old adage being rolled out - solicitors and accountants charge fees - why don't insurance brokers? This is far too simplistic. Solicitors and accountants sell only advice - the clock starts ticking as soon as you walk in the door, and good advice or bad, and whether you heed it or not, you pay for it.

    However, in my experience the vast majority of customers who use the services of an insurance broker are not simply looking for advice - they are looking for a product or package of products attached to the advice to solve their particular problem. They want to know how much those products will cost them, and may well wish to compare different offerings from different players. And they don't want to pay a fee during this process - though they're happy that the broker earns if they take up his offer of a product.

    Indeed, you expound the virtue of such a transaction when you used an Independent Financial Adviser (IFA) to buy life cover. I'm sure you were offered two choices by the IFA -"I can charge you a fee now, whether or not you take up a policy with me, or alternatively I can be paid commission for any policy you subsequently decide to buy through me". You chose commission.

    Financial services products are generally long-term contracts with a significant investment element which could be damaged if commission earnings were excessive, and where it would be very difficult for the customer to spot until it was too late. Hence commission disclosure does have some merit for long term business.

    General insurance on the other hand is normally an annual contract with no investment element. There is plenty of competition for custom. Do customers care what the earnings of a broker are in such circumstances? If they don't like the price, they won't buy.

    If commission disclosure is deemed to be good for consumers then it begs the question of why other "retailers" are not required to disclose their earnings on product sales. Why aren't supermarkets required to disclose just exactly how much they're making on a tin of beans? Surely there's very little difference between general insurance sales, and say the sale of a holiday? Just how far are we prepared to let the state nanny commercial transactions?

    Perhaps most important of all is how much will it cost the industry (and thereby the policyholders) to calculate and disclose these numbers?

    And if they're going to ask for disclosure it has to be even handed. It's no good going at it half-cock and providing numbers that are misleading. For total transparency to work all costs of distribution and administration need to be disclosed. If the product sold is not commission paying, then marketing costs will need to be considered. How easy is that going to be to introduce in an even handed way?

    That's without considering other commercial arrangements that exist in the market today. If one broker's account is more profitable than another's due to his skill in client selection etc. how is any reward for this to be shown? If another broker commits to provide one insurer with an agreed volume of a particular class of business, how is the economy of scale to be rewarded and disclosed?

    So come on, get real. The general insurance industry (and I mean industry, not profession) is so diverse that a single method of remuneration might be very laudable, but is simply not practical. It's all well and good for some customers to pay a fee instead of commission, and most who want that sort of arrangement are already there. But for the rest - it ain't broke so don't try to fix it.
    Grant Ellis

    Dear Grant,
    I have great respect for you and what The Broker Network has achieved in the general insurance industry. But your defence of the commission principle does not stand up to serious scrutiny.

    Indeed, I am shocked that you equate insurance broking with flogging a holiday. An El Cheapo flight to the Costa del Fish and Chips bears no relationship to putting together a complex commercial insurance package.

    Nor, for that matter, should it be equated with even electronic click-of-a-mouse bog standard motor cover. The shrewd broker will be trying to cross-sell to that client.

    It was remarkable that you failed to mention the two words that are now so closely linked with the practice of insurance broking: risk management.

    Let us take commercial insurance. What the broker, along with the insurer, now needs to provide is service. That is paramount for the customer. Even putting together business interruption cover entails detailed analysis of a company's future earnings, for example.

    Risk management is a skilled part of the advice the broker, working with the insurer and, indeed, the loss adjuster, can provide to show a company that it is working hard in its

    interest. Insurance, or risk management, is now something taken seriously at boardroom level, and this is where expertise is vital at the broker end. It is advice and a back-up programme if things go wrong that merits a fee, not commission.

    On personal lines, I have long advocated net rates, believing the amount of "fee" should be left to the judgment of the broker, who should try and discriminate between types of insured. Over-reliance on computerised selling for the sake of it can be done by anyone. The frontline staff at a high street personal lines brokerage need to be thinking laterally for everyone who walks through the door.

    I was also surprised that you regard insurance as an industry and not a profession. Perhaps you should have a chat with the Chartered Insurance Institute (CII). It will talk to you about the need for continuing professional development (CPD). Note the word "professional". The CII has also gone to considerable lengths to provide a new designation of Chartered Insurance Broker - again denoting professionalism.

    As to the "annual" aspect of general insurance, it is now quite standard for commercial cover to extend beyond the 12-month cover. A rolling cover for say, three or five years, makes more sense. That to my mind requires a fee, not commission.

    You go a bit wild when talking about supermarkets and baked beans. We must raise our sights when comparing the role of the insurance broker. You do not need advice to decide whether you want Heinz baked beans or a tin of beans with the supermarket label.

    You cite, as the most important issue, how much it would cost the industry and policyholders to calculate and disclose these numbers. The answer is simple: it will cost nothing to add a line on the policy headlined "fee". Motor brokers were quick (and right) to add a line for insurance premium tax, letting the public know that the Chancellor had his sticky digits in their wallets.

    You have, frankly, listed nitpicking excuses to justify an outdated means of remuneration that may have had its place in the 1960s, but not the 21st century.

    Many brokers stick to commission because it is too easy. Commission of 5% on £100 is a fiver - simple and end of story. It is not heady stuff of which Mensa would be impressed. Commission is based on the rate charged - the premium - and has nothing to do with being a professional and offering advice. Fees are based on an expert saying to the customer "in my opinion" this is best for you. The simple test for me with a broker is not "How much?" but "What do you advise?"

    I know which type of broker I would want to be out of the two.
    John Jackson

    Dear Grant,
    It is a pity that you are so forward-looking in many respects, yet cling to the outdated idea of commission.

    I agree that brokers are salesmen and so is the chairman of ICI. Image - branding - is a key factor in today's competitive business world.

    Transparency is now the name of the game. Brokers will have to get used to it. The Financial Services Authority (FSA) will regulate brokers in 2004, and openness is going to be a big theme under the new statutory regime.

    The consumer wants more information on what they are buying - commercial as well as individual buyers of goods. They want improved service. They want to deal with qualified professionals. If the emphasis, as you seem to be arguing, is on "selling", then heaven help those brokers who continue to stick their heads in the commission sand.

    Fortunately, the tide has turned, and many brokers are already turning to fee-based income - and not just the mega brokers (who moved to fees ages ago).

    They know that professional advice is a safe route to selling the product. But the product itself is not the end -only a means to the end.

    Above all, brokers need to retain their clients. Anyone who has ever been on a management course knows it costs far more to win a new client, both in time and hard cash, than to retain an existing one. What is the added incentive for the client to stay loyal? Advice is the answer. Service is another reason. Clients have to feel they need the broker. More to the point, they have to feel that they need the broker they are with currently.

    Of course, brokers have strong personal ties to clients, whether they charge commission or a fee. Insurance broking is very much a bespoke business. But why are brokers so shy about fees? One could provide a string of professional people who supply services and products, but charge fees; everyone from veterinary surgeons to business consultants.

    But not insurance brokers. They are going to keep their commission closer to their wallets than a dead-heat.

    It is a symptom of the mentality of many insurance brokers that, deep down, they do not want change. But fresh thinking is coming into the broking market. We are now in a broking world where the new breed of broker sees technology as an integral part of the business, not a toy for the back office. And who wants to scrap the old ways and bring in the new.

    Commission suited the old world; but it is the fee-based insurance broker and corporate risk manager who will win the new world.

    John Jackson

    Dear John,
    I too have the utmost respect for you and your achievements as an insurance journalist of some note. But, with the greatest respect John, you have your head in the clouds.

    I have been an insurance broker for over 25 years, and in all that time I've known what my job was - to sell insurance. I am a salesman. I might be selling a product with services attached - I may occasionally sell just a service. But I am a salesman. I would suggest that all successful insurance brokers are salesmen too. It goes without saying that we have to know our subject - this is where the professionalism comes in. But unless I can convince by customer to buy from me, I do not earn a living.

    In my experience customers who are offered the choice of either a "fee for advice whether or not you decide to follow it" or "advice, and if you decide to take it I earn commission" tend to opt for the latter - at least until they are comfortable with the broker concerned - when some may be willing to move to fee-based remuneration. But even then customers do not like surprises. They tend to want a fixed fee for their portfolio.

    Risk management is a red herring. It's nothing new - brokers have been giving risk management advice for years. "You need to put a five-lever lock on that door Mr Customer" - that's risk management advice. To suddenly shroud it in mystery and suggest that it's a specialist service which has just recently become necessary is rot (although I accept that due to market conditions it has of late taken on a more prominent role).

    You advocate net rates for personal insurances and suggest a "fee" should be set by the broker dependent upon his view of his costs. I agree whole-heartedly, but I vehemently disagree with the need for the amount of this "fee" to be disclosed to the customer. It's simply an overall part of the cost of the product and service being offered, the totality of which the customer can either accept or reject. The broker might want to cross-subsidise his product range, offering loss leader policies and cross- selling incentives. What customer has the right to know in detail how this is made up, or perhaps more importantly, could they care less? I think we severely underestimate customers if we think they don't understand how this all works.

    You feel that the cost of disclosure will be minimal. I think you're way off the mark with this unless, as you seem to be suggesting, it will simply be the broker who has to disclose his earnings. If that is the case, and other "vendors" of insurance are not required to disclose their earnings, brokers will once again be placed at a commercial disadvantage.

    And finally John you suggest that you would always choose a broker based on the advice rather than a commission. Can I suggest that you did exactly the opposite when choosing an IFA? He earned commission when you purchased a product from him. You could have opted to pay a fee for advice which you could then either accept or reject, but you didn't, you chose to take the free advice.

    It's all very well taking the moral high ground and rather pompously looking down our collective noses at commission. The reality is that it's what most of us would opt for in the real world.

    Grant Ellis

    You've read the arguments in our debate, so who do you think is right? John Jackson with his move away from old practices or Grant Ellis with his traditional views? Let us know by emailing your comments to andy@instimes.co.uk

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