Eric Galbraith of Biba says unity is the only way to resist the pressures on our sector.
Life at Biba House in these uncertain times is a bit like how I imagine it feels to be caught in an accordion. For the less charitable among you, I don’t mean all wind and bellows, but the continual expansion and contraction as we unwind and collect ourselves after having dealt with one issue before the next rush of air blows in something new.
The government is to be applauded in making available at least £50bn of capital to recapitalise the UK’s banking system. Wider moves to strengthen UK investor protection and ensure greater financial stability are also deserving of praise.
It is the funding model of the Financial Services Compensation Scheme (FSCS) that causes our accordion to miss a beat and the notes to become discordant, however. General insurance intermediaries and brokers are facing the maddening prospect of having to pay for a collapsed bank by topping up the FSCS in the event of a shortfall.
Something is seriously wrong when a compensation system results in some of the smallest businesses in the country paying for the failed strategies of the very large, while also putting them at a significant competitive disadvantage to similar businesses across Europe.
All the Biba members I have spoken to about this are furious that they will be squeezed to pay compensation for losses that have not even stemmed from their business sector. We are the only country in Europe where this happens.
Biba fought against the proposed new funding model of the FSCS, which came into effect in April 2008. In particular, it challenged the explicit cross-subsidies between firms in different business sectors that were introduced.
We gained a significant funding concession for brokers, but we maintain that the compensation mechanism is flawed. Bradford & Bingley et al have proved we were right and we will continue the fight against the unfairness of this system.
Those brokers that do not yet disclose a separate “eligible income” figure to the FSA should do so as a matter of urgency. Brokers should not allow themselves to be caught out by additional costs related to the compensation scheme in the same way as some firms were by the goodwill issue earlier this year.
That issue had also been flagged three years earlier, yet there was a last-minute rush by some firms to find new sources of funding to meet capital requirements.
Insurers can pass on increased costs to their policyholders through raised premiums without having to explain themselves. Brokers do not have this luxury. Perhaps it is time for brokers to pass on these costs and to declare on any customer documentation a separate charge for the FSCS. This is not ideal but, at least if we all do it, we will all be brought a step closer to understanding just how much this banking bail-out is costing us individually.
These difficult times are exactly when brokers and intermediaries can prove their worth to the customer. Now more than ever, brokers need to demonstrate their value. They need to counsel their clients that, while reducing or cutting vital insurance protection for themselves or their businesses in an attempt to save costs may seem an obvious move, it could ultimately prove a false economy.
With all that is going on, it is important that the general insurance intermediary and broking community has a strong, unified voice. Now is the time to work together to promote our industry while recognising and embracing our differences as we have always done.
Much has been written about the recent formation of a new trade body that will focus on international wholesale and reinsurance business.
As someone with a strong commercial background, I believe the last thing we need in our sector is yet another trade body, but change happens and in the longer term we will all be stronger for it. For Biba it is business as usual. We will refocus our London Market Brokers’ Committee, pick up on the important issues and move forward.
I don’t want this change to create factions over small brokers, large brokers or any other category. All broking is competitive and our sector will remain, by its nature, one of the most competitive. This is a strength but, if we allow this competition to weaken our voice as a sector on trade body issues where, as yet, we have no differences on policy, then it will damage the good work we have done in the past.
Biba is leading the market solution on transparency, conflicts and status. Our London Market Brokers’ Committee is supportive of this, as is the IIB and the new London market association.
Eric Galbraith is chief executive of Biba.