London brokers under regulatory scrutiny | Wolters Kluwer
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  • London brokers under regulatory scrutiny

    By Michael Imeson

    Published January 10, 2018

    Brokers in the London insurance market are the subject of a study by the FCA to see whether action is needed to deal with anti-competitive behaviour, abuses of market power and conflicts of interest, writes Michael Imeson.

    The Financial Conduct Authority has just launched an in-depth study into London’s wholesale insurance brokers market in the wake of complaints from insurers and policyholders that some brokers are acting unfairly and charging too much. Announcing the study on November 8, 2017 the FCA said it wanted to ensure there is enough competition and innovation in the sector, and that it is operating in the interests of clients.

    The study comes after the chief executive officer of Chubb, the world’s largest property and casualty insurer, complained publicly earlier this year about the “abusive behaviour on the part of some brokers who enrich themselves at the expense of both their customers and underwriters”.
    Officially, brokers say they welcome the study as it will give them the opportunity to demonstrate they provide real value to policyholders and do not exploit insurers, but they have asked for more time to respond. Unofficially, they are worried that the regulator’s probing will unearth some unsavoury, or at least anti-competitive, practices that will lead to regulatory action.

    The changing role of brokers in the London Market

    London’s insurance market – usually abbreviated to just “the London Market” – is a distinct part of the U.K. insurance and reinsurance sector, centred on the City of London. It consists of brokers and insurance underwriters who focus on large, complex commercial and specialist risks. Their clients are large corporations and reinsurance companies around the world, as well as portfolios of smaller companies and individuals. The London Market generates more than £68bn a year in gross written premium and the FCA believes that, with brokers developing new services and business practices, it is time to take a closer look at their operations.

    “Brokers play an important part in the wholesale insurance sector ensuring clients get appropriate coverage at good value,” said Christopher Woolard, the FCA’s Executive Director of Strategy and Competition, when announcing the study. “However, following significant changes in the sector, we are looking at the dynamics to ensure competition is working well.”

    Most underwriting in the London Market is intermediated by brokers. These brokers place risks in the market for their own UK and international clients, or for other U.K. and international brokers. “The London broker’s role is to make sure that their clients obtain appropriate coverage for their needs, at a price that represents value for money,” says the FCA.

    “Competition between brokers can enable clients to access coverage which best meets their needs, not only in terms of price but in respect of other important factors such as breadth of coverage, financial limits of policies, the insurer’s claims handling and its financial strength, and the insurer’s risk management services.”

    However, the last time the sector was examined in detail by the regulator was 10 years ago, and since then there have been many changes, such as:

    • A prolonged “soft” market, with declining premiums, which “has put pressure on brokers’ earnings from commission”.
    • Brokers have developed new services, including data and analysis services for insurers. They have also taken new approaches to “market selection and placement” for policyholders – finding the best insurance in the market, and placing it with insurers. One of these new approaches is the development of “facilities”: a facility is the grouping together by a broker of a large number of clients with similar risks, and then placing that facility, rather than individual clients, with an insurer.

    The FCA believes that these developments may lead to some larger brokers using their market power to oblige insurers to pay for additional services they may not want. Another concern is that some brokers will place business with insurers that pay higher commission, which “may have the effect of limiting the number of insurers underwriting business in a particular sector”, putting clients at a disadvantage.

    The FCA’s study – what it will explore

    The FCA study will therefore look at three areas of wholesale insurance broking to assess how well competition is working. They are:

    • Market power. The FCA wants to discover if some brokers have significant market power, and if so how this affects competition. By “market power” the FCA means brokers being able to raise their commissions above normal, or to force insurers to pay for additional unnecessary services, or to encourage insurers to underwrite facilities (groups of clients) rather than individual clients. The study also asks how easy it is for new brokers to enter the market and offer lower prices, and if this constrains existing players from exercising their market power.
    • Conflicts of interest. When brokers select insurance for their clients, the FCA wants to know how likely they are to choose insurance that provides them with higher remuneration rather than the insurance that best meets the clients’ needs.
    • Broker conduct. The FCA wants to know to what extent brokers exclude certain types of insurers – often smaller firms – from some business, thus reducing competition. It will also explore how some brokers “co-ordinate” their activities, through formal or informal agreements.

    The FCA is inviting feedback from brokers, insurers and policyholders. They have until January 19, 2018 to respond. The authority is gathering information in other ways, including one-to-one meetings, roundtable events and market research.

    It will publish an interim report by autumn 2018 which will analyse the responses and suggest potential solutions to any concerns. A final report will follow in 2019.

    Regulatory action?

    If the final report judges that competition is not working, “we may intervene to improve outcomes 
for clients”, says the FCA. “We can do this in several ways, including rule-making, publishing general guidance, proposing better self-regulation for the industry or introducing firm-specific remedies or enforcement action. We can also remove existing rules that create disproportionate barriers to entry, expansion or innovation and refer issues to the Competition and Markets Authority (CMA) for further investigation.”

    On the other hand, the FCA says it may decide to take no action. This might be the case if it identifies no concerns that could be addressed by regulation, if anything it finds is likely to be addressed by forthcoming legislation, or if brokers themselves decide to take steps to remedy any problems.

    Insurer forecasts a backlash against brokers

    Considering what Evan Greenberg, chairman and chief executive officer of Chubb, the world’s biggest property and casualty insurer, wrote in a letter to shareholders in April, it seems likely the FCA will find a reason to take regulatory action. He described the behaviour of some brokers as “abusive”, accusing them of exploiting the current “soft” insurance market – with excess capital chasing declining demand – to “enrich themselves at the expense of both their customers and underwriters”.

    “Cloaked in the mantra of ‘customer best interest’ or ‘treating customers fairly’, they seek the cheapest price and broadest coverage at commission terms that by any measure are excessive,” wrote Mr Greenberg. “Forcing underwriters to succumb to the lowest common denominator is hardly in the customer’s, or industry’s, best interest.

    “These predatory behaviours, which have shown up around the world, and in London in particular, are simply unsustainable from an underwriting perspective and will come back to haunt these brokers: there will be customer and regulator backlash, or worse. Remember, distribution can be dis-intermediated.”

    The International Underwriting Association of London (IUA) is currently consulting with its member insurance companies how to respond to the FCA’s study. “The issue was discussed at a recent regular meeting with FCA officials who are keen for individual IUA members to respond to proposals on the terms of reference for the study,” said Dave Matcham, the association’s Chief Executive. “It is not intended that the exercise will assess firms’ behaviours against competition law, but will look at how competition is working in the sector and whether it could be made to work better in the interests of end-clients. Clearly this is an important objective.

    “The IUA will, of course, be seeking to provide comments to the FCA by its January 19, 2018 deadline. 2018 will, however, be a very busy year for regulatory developments in the insurance industry. Individual companies will face some pressure to provide detailed responses within relatively tight timeframes on a study with a potentially wide-ranging impact across all classes of business and on overall corporate strategies.”

    Brokers defend themselves

    Brokers generally have remained quiet about the criticism levelled at them while they consider their official response. However, Aon, one of the three biggest London insurers, issued a statement saying it “welcomes this study as an important opportunity to ensure that all elements of the London insurance market are working to drive outstanding client outcomes in a competitive environment”. It adds: “We believe it is critical to continue to focus on innovation to ensure London remains a competitive international centre for insurance and we look forward to contributing actively to the market study.”

    The London & International Insurance Brokers’ Association (LIIBA) is worried about the lack of time to respond. “The broking community wants to do everything possible to help deliver a properly informed review by the FCA, but there is no doubt that timing is an issue,” says Christopher Croft, the association’s Chief Executive.

     “Every broker to whom we have spoken has expressed serious concerns about their ability to deliver complex and detailed information to a very tight timetable. With less than 10 weeks before the deadline and a raft of impending issues such as the year-end renewals, the introduction of the GDPR (General Data Protection Regulation), a new regime following the IDD (Insurance Distribution Directive) and the forthcoming SMCR (Senior Managers and Certification Regime), the pressure on available resources is very high. We believe an extension of the deadline would deliver a better result for the FCA.”

    Legal opinion

    Nick Bradley, Partner and Head of Insurance at law firm Pinsent Masons says large insurance brokers in the wholesale market can expect to be “under serious scrutiny" from the regulator in the year ahead. “This marks the beginning of a potentially long examination of the market by the FCA with promises to gather data and information, engage in discussion, carry out roundtables and research to make sure competition is working effectively.

    “The timing of this study could arguably be better given firms are in the midst of grappling with Brexit. Nonetheless it is better for brokers, to the extent possible, to engage as openly and fully from the outset.

     “The regulator is specifically focusing on the development of facilities as an area for particular scrutiny. It is concerned that large brokers may be exerting market power to oblige insurers to sign up for facilities; that conflicts of interest may be coming up because of the higher commissions some facilities can attract; and that broker conduct may be compromised if smaller underwriters are being squeezed out because risks are not being placed on the open market.”

    Insurance policyholders have been largely silent on the issue. No doubt we shall discover what they think when the FCA publishes its interim report in autumn 2018.

    About the author: Michael Imeson Chartered MCSI is Contributing Editor of The Banker magazine; Senior Content Editor at Financial Times Live where his role is to organise and/or chair events on financial services; and the owner of editorial services agency Financial & Business Publication. Michael is also a regular contributor to Wolters Kluwer’s Compliance Resource Network.  

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