13 January 2013

FT: Critics push for broker fee transparency

In spite of growing concerns among some underwriters, brokers and corporate insurance buyers, there is little sign that regulators are planning to launch another probe into the practice at any time in the near future.

The rules on contingent commissions – which insurers pay to brokers based on volume or profitability of business placed with them – vary by jurisdiction. In New York and London such payments are not banned, although brokers are required to make certain disclosures to clients.

Critics argue the disclosure requirements are inadequate. All three of the world’s big insurance brokers decline to say publicly how much they receive in contingent commissions.

Commissions of one kind or another have been central to insurance brokers’ business models for decades. Indeed, [former New York attorney-general] Mr Spitzer’s inquiry focused on the dominance of the big brokers as much as contingent commissions in particular.

In lines of insurance that are entirely commission-based, there is little potential for conflicts of interest. “That’s no different from buying a car from a salesman – you can always go to someone else”, as Mr Hepburn [chief executive of Mactavish, the UK insurance governance boutique] puts it. He says problems arise when brokers are paid flat fees by their clients – leading policyholders to expect the brokers to act on their behalf – while at the same time being paid by the insurance companies. He says contingent commissions – “a payment based on an outcome that is favourable to the insurer” – are especially problematic.

John Hurrell, chief executive of Airmic, an association of UK corporate risk managers that comprises 450 of Britain’s biggest companies, says the prevalence of contingent commissions is between “non-existent and minuscule” at his end of the market. “We go back to our members twice a year about what’s going on in the market place and there is a high satisfaction level”, he says. Mr Hurrell suspects the payments may be more widespread in the middle or small commercial insurance market, where policyholders are perhaps less savvy and have less frequent dealings with brokers.

Full article (FT subscription required)

© Financial Times