Commercial customers are ignorant of the cosy world of insurance, says Anthony Hilton

The head of the FSA, John Tiner, has been heard from time to time to wonder why the customers of insurance brokers put up with the way they are treated.

Why is it that giant corporations, who have become used in recent times to looking beadily at every cost to see if it could be cut, are still incredibly lax when it comes to insurance? Why do they tolerate waiting months to get their policies and put up with painfully slow and inefficient claims handling processes when in their hearts they must know they are the ones paying for this inefficiency?

It is a question the FSA is likely to ask more and more in 2005 as it moves insurance to the top of its agenda.

The industry may not like the response. Most risk managers in companies, in spite of the grand titles, are simply the insurance buyers and the odds are that they have a background in insurance broking themselves.

The odds are that they were recruited from the broker who handles the business and they therefore have a close identification with the firm.

Insurance being a commodity business, this goodwill is then cemented by lavish hospitality during the UK season and extensive overseas fact-finding trips. And in such a cosy structure it is easy to take things for granted.

Next it is often the case that insurance comes under procurement rather than as risk management. In other words it is bought this year because it was bought last year - which is procurement - whereas were it part of the risk management process the need for it would be assessed. It would be treated as a hedge and the nature and cost of the hedge would be looked at before deciding whether or not to go ahead with it.

And finally, risk managers in corporations do not always report to an operational head. It is more frequent for them to report to a company secretary where the onus is on administration as usually it is also with a finance director.

So arguably the wrong people are doing the buying and they are also reporting to the wrong people. And of course they don't complain.

It matters too that there is no tradition of corporate governance in insurance. The industry has always been closed off from the rest of the financial world. As a result it has never sought to address the conflicts of interest that are liberally sprayed throughout its everyday custom and practice.

It instead takes the view that these have always existed, no attempt has been made to hide them and no customers have complained.

So what is the problem? The answer to that depends on who you ask - a fact that should cause the insurance industry real concern because the big differentiator is how long people have worked in the industry. Those who have had a lifetime in insurance broking are still inclined to see New York attorney general Eliot Spitzer's investigation into Marsh as a storm in a teacup, and to think customers don't complain because they do not know what is going on.

Relative newcomers to the industry take a different view. They think the industry's business model has to change fundamentally. It is not simply a matter of switching from commissions to fees.

The industry first has to decide who are its clients and who are its customers. Then it has to define properly what value it adds and what service it provides. Only then can it set a level for its fees.