The mandatory disclosure of insurance commissions - monies paid by insurers to intermediaries to place risks with them - remains under the regulatory microscope. At present, a broker must disclose commission information if its commercial client requests it but, beyond this, disclosure is not mandatory.
In the forthcoming months, however, the FSA is expected to publish a Discussion Paper on the topic, inviting views on the cost-benefit analysis of mandatory disclosure. The Paper is expected to take into account questions on the wider issues of market efficiency and fairness, along with the potential benefits of standardisation.
Initial study
In October 2006, in his speech to the Insurance Institute of London, the (then) Chief Executive of the FSA, John Tiner, announced that this issue would be a priority for the FSA in 2007/8, and that it would consider making such disclosure mandatory. Mr Tiner promised a thorough review of the situation, including an “objective Market Failure Analysis” resulting from non-disclosure, and a “corresponding Cost Benefit Analysis”, to determine whether the benefits of mandating commission disclosure would outweigh the costs of introducing it.
Following that speech, the FSA engaged CRA International to undertake a comprehensive study, and CRA recently published their findings. The key findings were:
- “Middle segment” clients - businesses with an annual turnover anywhere between £500,000 and £100 million - are most at risk of suffering detriment due to non-disclosure, owing to the high reliance upon intermediaries in obtaining insurance, and the tendency for such intermediaries to be remunerated through commissions from insurers rather than fees from the client.
- This “middle segment” represents around 10% of commercial clients, and these clients, being unaware of the commissions they are paying, suffer detriment through paying higher commission and obtaining lower value products.
- Crucially, CRA found that the compliance costs associated with a mandatory commission disclosure regime - estimated at approximately £87 million of one-off costs (for both insurers and intermediaries) and £34 million of ongoing costs - are not likely to be exceeded by the benefits from reducing market failures (primarily enhanced competition amongst intermediaries).
Further work
The FSA has said that it has decided not to mandate commission disclosure at this stage, but it believes that it needs to do more work on the wider issues relating to market efficiency. The FSA has announced a series of measures that it plans to take forward in the coming months.
- A Discussion Paper in the first quarter of 2008 inviting views on the cost-benefit analysis of mandatory disclosure (see above).
- Thematic work on conflicts of interest. This will examine the extent and nature of the conflicts of interest arising from the remuneration and contractual arrangements between insurers and brokers and how these are managed.
- An investigation into ways to raise commercial customers’ awareness of the value of commission information.
Comment
The timing of the FSA’s work will mean that it will be well-positioned for the European Commission’s review of the Insurance Mediation Directive which is expected to cover the subject of commission disclosure. It is anticipated that the review will take place within the next two years.
The FSA certainly has its work cut out. The CRA’s findings identified a number of different sources of Market Failure, and these will not be easy to address. The issues are not limited to maintaining healthy competition; there are also complex conflict of interest issues to be resolved (resolving this is a concern shared by the European Commission). Furthermore, even amongst intermediaries who disclose their commissions earned (whether as a matter of good practice or because their clients have requested the details), there are variations in the level and quality of disclosure. The solution will not be a simple one.
The industry awaits publication of the FSA’s forthcoming Discussion Paper. The issue remains high on the FSA’s agenda and it is therefore a case of “watch this space”.
Further reading
Click here for the FSA Press Release
Click here for the full CRA International Report
