Our panel discusses conflicts of interest, Treating Customers Fairly and iMarket
Chair:Andrew Holt, Insurance Times
David Curry, HW Wood
Terri Grainger, Mansion House Executive
Ben Buckton, Brit Insurance
Martin Davidson, Willis
Hala Melcon, JLT Group
Brian Watson, Jelf Insurance Brokers
Clair Hayward, Footman James
Lynn Harris, Groupama
Chair:I'd like to start with conflicts of interest. Is this issue being dealt with sufficiently in the market?
Lynn Harris: Conflicts of interest is quite a diverse subject. I believe the FSA really have provided sufficient information and the ARROW visits are quite useful. Any areas where procedures can be improved, it will come out during the process. I must admit that I have received FSA documentation in the past and you sometimes have to take a deep breath and ask where am I going to start? Everybody just needs to accept it. No-one likes change and most people have just got on with it. I don't hear anyone grumbling now. But, here we are, a year in, and have there been any major problems?
Chair:What would you suggest to the FSA? How would they actually deal with the issue better, more constructively?
David Curry: I have often felt that rather than making those sorts of comments, if they have found something concrete which they believe is a real issue that a broker or insurer is doing, I think they have to make a stand and come down maybe on that broker or insurer and say, 'We're going to fine you because you haven't done this'. At the very least, that is going to act as a deterrent if people are doing something wrong.
Terri Grainger: Is it that we're not communicating effectively about the things that brokers do, like the claim service and things like that, where the FSA think there might be a conflict of interest? Are we not communicating effectively what value that adds to the client?
Curry: It really falls on the likes of the ABI and Biba. You are dealing with this organisation, and John Tiner has said in the past that it's their job to set the parameters, to set the framework. I think everyone else is left to get on with it and that's why, where the broking community is concerned, I don't think there's ever been any clarity on, say, demands and needs statements. I see a lot of brokers and they have different demands and needs statements and different structures and different ways of approaching it than anyone else. The FSA are saying, 'We have set the framework'. When someone does it wrong, they are then coming out with comments saying there is a conflict of interest.
Chair:That seems to be the view of Treating Customers Fairly. In one way it's specific, but it's also quite vague at the same time.
Harris: The FSA has approached this correctly. It has avoided specific rules and given guidelines. I'm surprised that FSA cluster reports have not been mentioned. They are really useful to provide comparisons with our own businesses. They have certainly helped me understand product development issues. At the end of the day, TCF and conflicts of interest come down to applying sound business practice and common sense.
Grainger: Would you want regulations that are really prescriptive all the time? I think what they're doing is relying upon our common sense as well. We have all this experience; is it not to us to take the challenge as well?
Ben Buckton: If the FSA are going to comment on it, they need to put the structure behind it. They need to provide clarity for brokers and insurers alike with regards to the specifics of the rules. They can't just put out woolly statements saying you can't have conflicts of interest. What do you specifically mean by that? Do you mean that we can't have any contingent commissions? Do you mean we can't have any volume deals?
Grainger: I think they've made the point that, with the commissions, viewing conflicts of interest as narrowly as that is wrong. We need to have a wider view of what conflicts of interests are.
Buckton: It is not for them to set out the structure behind how we will trade in the market? If they are our regulator, surely it is for them to tell us what is acceptable and what's not acceptable.
Martin Davidson: The FSA say that they pride themselves on listening to the insurance brokers that they work with and it's important that they do so because they are still a relatively new regulator to the general insurance sector, for the brokers especially. I personally don't have a problem with the way that the FSA have approached the issue so far. They haven't been overly prescriptive; they have set out what they think their views are and they have asked for feedback from the broking community. I think in their Dear CEO letter they set out the issues quite well.
Grainger: I think that's why brokers need to be putting the systems in place that they're wanting. I think all brokers are saying it's not an issue for them, which is probably true, but it's just not properly documented. Everything the FSA is about is imposing on the industry things the industry has often been doing but not necessarily documenting them properly. I think this is just another area where we are probably doing it, which is the reason why some brokers are quite angry about it. I think if it makes the industry more professional, then it's worth it. What you don't want is for the FSA to come back and be too prescriptive and then we are just involved in a whole load of regulation that we could do without.
Hala Melcon: I think the FSA regard the processes in the insurance industry in isolation from one another when they shouldn't be. At the end of the day, insurers and brokers work together; that's the way it's always been. I believe that a regulator's role should be to remind both the broker and the underwriter to be clear about who the client is, to require us to treat him or her fairly, and to punish us when we don't. I think that's really what they should aim to be doing. At the end of the day, it's in our clients' interests.
Grainger: I think one of the reasons is that the FSA has treated the larger brokers and the smaller brokers the same. They are giving them all the same deadline and things like that. Really they need to consider more the impact on smaller brokers, and they might need more time to do this type of thing than the large brokers.
Brian Watson: We have taken the FSA's CEO letter and the recommendations, and we've set about taking a proactive approach to conflicts of interest. We know they are there; it's just how we manage the conflicts of interest. We have set up a conflicts of interest panel which meets every month to discuss conflicts of interest and the issues, and we feed back to the FSA that way. Senior to bottom, everybody's aware of it and takes a proactive approach. We feel that we're doing the client justice.
Clair Hayward: From my point of view, having just recently moved into a broker, I have been swimming in FSA stuff for the last month. I think the ideas behind it are sound and that the policies they have introduced are for good reasons and for sound reasons. I think some of the concerns are about whether we have swung from side to side without meeting the middle ground. Certainly from a regional broker's perspective, one of the things you notice is from a management perspective you can be spending 50% of your time doing FSA regulations. That's a huge amount of people's trading time. We're of a relative size so we can afford to do that; for smaller brokers, that's a real impact on their business.
Chair:Do you think the FSA should be more proactive in helping smaller brokers?
Grainger: I think it goes back to the deadline for January, which was for all brokers irrespective of size. If it ends up that as an industry brokers don't respond properly and the FSA comes in with prescriptive regulation, it's going to end up with smaller brokers perhaps even folding and going out of business. You are then going to end up with more direct insurers coming in, which from what I gather is where more of the complaints come.
Hayward: The reasons for that are quite clear because the smaller brokers haven't got the time to do it. It is a huge job.
Davidson: Obviously what you refer to is processing, but I think that's just a reality now of the regulatory obligation that we have. It isn't going to go away, but I think there's definitely a role to be played in making sure the rules are simplified and interpretation is made as clear as possible. I think that would solve a lot of the issues that brokers have, so perhaps there's a slightly different issue from the issue of conflicts of interest itself. I think it just goes back to the role of dialogue, communication and making the broker's life as easy as possible where that is possible.
Hayward: It's all very well us sitting on one side and not talking to them about it, and it is difficult to have a conversation with them. However, if you look at the changes they have made in their ARROW business, the types of things they focus on now compared to 12 months ago are completely different. I think it's an evolving, moving thing because of the nature of it and because we've not had this type of regulation within our sector of the industry before.
Buckton: It is a learning curve for everybody, but I think there needs to be some tri-partite meetings - brokers, insurers and the FSA get together and have an open dialogue. It needs to include regional brokers and insurers to ensure that we're all on the same page.
Watson: They need to be a lot more accessible at the same time for the smaller brokers. If a small broker has a problem, they need to get the advice they need.
Melcon: When the FSA comes out with a statement about there being conflicts of interest between insurer and broker, it automatically alienates people. You are antagonising them and we should better describe it not as a conflict of interest but as a congruence of interest. There are obviously similarities; if this wasn't the case, why would the insurance industry have been running for as long as it has? I think the FSA just needs to do a little bit more research. I think they have the groundwork there and the potential to move forward with the whole initiative, but they really need to start communicating with people and finding out what they want as opposed to what they think.
Davidson: I think it has to be remembered that a central part of the FSA's requirements is that the processes they require to be in place are documented. I think a lot of brokers maybe feel that they are complying in principle with the FSA rules, but there isn't this documentation trail that the FSA require. I think that has been seen in the other financial-services industries. They have this massive focus on making sure that safety processes and procedures are properly documented, and that is work for a lot of the broking community to do.
Chair:Why are brokers not embracing imarket in the way that it should be or the way the way that the people who promote imarket say it should be?
Davidson: I think there's a lack of an overall market-wide approach to the issue of electronic trading. I think a lot of brokers have maybe developed their own systems for their own benefits, but when it comes to a more market-wide e-trading platform solution I think that is where it has fallen down. There are going to be different agendas that different companies have, and I think that was maybe part of the reason why Kinnect failed in the end. It just didn't have the wide support it needed. I think it has been said that technology has moved on since then, so I think that any e-trading platform that is in place has to respond to the needs of brokers and insurers.
Grainger: There is going to be more than one system; it is going to be maybe two or three working together.
Hayward: I think you are right about brokers having already invested in trading platforms. When people have invested a lot of money in that already, they are then very reluctant to invest in another one if they're not quite sure whether it's going to work or not.
Buckton: Again, there is always going to be a time lag as people catch on to what is happening. With imarket, I understand there is only the one product available and it is only available for Sirius and Acturis users with full end to end connectivity. Surely, when more products are available to the whole small to medium enterprises (SME) market, you are going to get brokers switching to the system. It will reduce costs and it will be beneficial to all parties, but brokers are waiting for it to happen before investing.
Hayward: There are quite a lot in the broker market that use Sirius and Acturis, but the hard facts are that there are an awful lot who use Misys, which is not being used by imarket. They already have these systems in place and you can't just suddenly uproot the whole system and put a whole new one in place.
Harris: For smaller brokers, it is difficult to change from one system to another. At Groupama, brokers using our Extranet can hopefully see that we are providing all they need.
Melcon: I think we have to remember that by the very nature of insurance, it is a people industry and it's very face to face. I think we also feel the need to catch up with things like the banking industry and the other financial markets. For them, it is pretty suitable to have everything done on an IT basis because they all need quick decisions. For us, it takes days to get discussion going. It's a process that needs to take time, and you can't rush decisions and you can't rush processes for the simple reason that you are trying to catch up.
Hayward: If you look at it and compare it to places like the banking industry, they use it very effectively at the smaller end but they don't use it in the larger deals. They have to talk to people and they have to have the detail. They have to underwrite it; like we underwrite a risk, they underwrite a finance package. It's the same principle but they are probably just a little further ahead on the smaller part of it.
Buckton: I think there will be a much bigger take up of imarket. If you compare it to Direct Line when they came out and started trading on the internet, people were not sure about the security of putting their personal details online. There is always going to be that a slow take-up of new trading methods in the commercial market; but eventually in five years' time, I can see the majority of SME business will probably be through the internet because it is quick, easy and simple. You can go through one platform and get a quote from five or six insurers. You are treating your customers fairly and you have contract certainty; it ticks all the boxes.
Harris: Sometimes the industry gets a bit taken up with things that don't work rather than looking at the positives. Imarket has achieved an incredible amount over the past couple of years. Look at how long it has taken full-cycle EDI within personal lines to evolve! Eight years down the line and it's still not been fully embraced by industry.
Davidson: It's a cliché, but for a change in technology you need a change in culture. You can have all the technology in place but if people aren't using it, it won't succeed.
Grainger: One of the points with Kinnect is that it didn't know what it wanted to be. People only talked about contract certainty a few years into the actual project.
Curry: Things like imarket will have their place in the years to come but they are not going to dominate the entire broker-insurer relationship. There is a very real and a good reason behind contract certainty and I applaud what the FSA are trying to do. This whole aspect about the contract-certainty deadline has to be tailored to the complexity of the risk we are talking about. Aside from imarket, some insurers have very capable online trading systems at the moment. The Hiscox system for small business has everything you want within five minutes. Allianz as well has some very encouraging systems. AIG, Zurich and more and more are on the way. However, it is for smaller-scale stuff. You are not going to get a petrochemical plant placed with about 20 insurers. It is very unlikely that you are going to have it all done by the deadline. I think a little bit more flexibility has to be taken in view of those complicated risks. Those sorts of risk are going to be done face to face through many discussions.
Harris: In terms of complicated risks not being suitable for electronic trading platforms — actually, never say never: a few years ago we might have said this with commercial risks so we could see these bigger risks available in a couple of years. But there are possibly some individual requirements on bigger risks that are too complicated to deal with electronically.
Buckton: In John Tiner's original speech, didn't he want 100% contract certainty? We have actually shifted that target down to 85% contract certainty to accommodate for the more complex risks that just aren't going to be able to meet the rules.
Davidson: Why can't the complex risk be contract certain? Surely it should apply as much to a complex risk?
Harris: From the customers' point of view, it is not unreasonable to expect that within a certain period of time you'd have the policy wording in front of you.
Davidson: Electronic data transfer systems must be part of the answer to that, especially for the documentation side and accuracy of information. That can only improve the flow of policy documentation and endorsements. It's certainly part of the answer, but we're never going to eliminate the face-to-face negotiations and deal making, which will always be part of broking and there is no reason why it shouldn't be. However, it should be backed up by proper systems.
Watson: I completely agree with changing the culture. A lot of small brokers are very wary of systems, and the more they base their lives on technology the more they can fail. It is a lot of resource and a lot of financial implication. There are a lot of systems out there and people have their online trading platforms as well. It's basically whether these small brokers can go over their head or deal with technology rather than face to face. In an ideal world, the smaller end of the market would run perfectly in a paperless office. Whether the generation at the moment would be able to do that, I don't know.
Buckton: Arguably, imarket would make it easier for those sorts of people because it would just be the one system. They go in and get the quote from everyone in one place, and they only have to learn one system.