The future of broking – Challenges and conflicts
The recent Mactavish report “Broker Conflicts” is perhaps a distraction from the real issues of survival currently facing the nation’s businesses and the insurance sector, but it nevertheless deserves to be addressed.
Insurance under attack
It is often said there is no better advertising than free publicity. The problem with free publicity is that the advertiser doesn’t write the script; and that is what has happened in the early days of the COVID lockdown as the action groups against insurers including Hiscox, QBE and other high profile insurers fed the media with stories of betrayal at a time when they were and still are needed most.
The outcome of this furore will not be known for several months after the High Court hands down to the FCA its judgement on the Business Interruption policies submitted for determination of coverage. Whilst waiting for it many businesses are predicted to collapse for want of cash to keep the lights on.
Persuading a public to trust again, that has repeatedly read of the sector’s reluctance to pay so many critical claims, will be a significant challenge. Above all, it requires a deep reflection on the underlying value proposition of what insurance is all about; to the buyer; not to the seller.
The mystery of insurance
Insurance is a mystery to just about everyone that is not actually involved in designing underwriting and selling it; and even some of those acknowledge that is not particularly user friendly at the sharp end. There used to be an expression, rife in the industry “we must educate the Insured to understand insurance”. It never happened because the insuring public does not want to be educated in something it does not want to buy and inherently does not trust.
Even the adoption some 25 years ago of “plain English” policies and the more recent regulatory obligation of “contract certainty” have not revolutionised the public’s ordinary understanding of insurance contracts; and that is because insurance is (for good reasons) too complicated for the average policyholder. That is why insurance is bought on price. It is the only part of the contract that everyone understands; but, regrettably, not the value proposition behind it. COVID-19 has proved that, beyond doubt.
The broker’s role
Insurance has been complex forever and long ago spawned the need for the insurance broker to act as a guide and facilitator to the buyers of insurance. For a very long time the law has recognised the broker as being (mainly) the agent of the buyer not of the seller. It broadly worked quite well that way because the underwriter was happy for someone they knew and trusted to introduce business to them in return for which they would pay a commission.
Historic records of “slips” in the London Market record commissions ranging from 5% to 20% as being a norm. That was still the case until a few years ago when the digitalisation of insurance offered new opportunities for the marketing, sale and underwriting of insurances. With it, curiously, the more intermediaries got in the chain and so commission can now be 50%, or more, of the premium.
Ironically, technology posed a threat to the traditional insurance broking role of face to face negotiations and the accumulation of mutual trust between professionals. Brokers recognised that their future depended upon getting a new role in the chain between the buyer and the seller. The opportunity to resurrect the concept of underwriting agent in the new form of Managing General Agencies, was quickly adopted by the larger brokers and soon copied by many others.
Transparency or conflict
In turn the relationship between the policyholder and the insurer morphed into a complex web of agencies and sub-agencies each of which carries a price for their service but which can obscure the value of the service to the policyholder. This unquestionably gives rise to potential conflicts of interest, which the insurance community has, with a few exceptions, managed relatively well, so far. Nevertheless, the recent published report from risk analysts Mactavish sent shockwaves through the sector calling for radical reforms of the relationship between insurers and brokers, so as to create transparency for the policyholder of what a broker earns for their value.
The Mactavish report focuses particularly on the remuneration of brokers and is apparently addressed to the buyers of insurance at the top end of the British sector and commerce. Often employing risk managers and in-house counsel to support the purchasing process, the policyholders typically engage with the larger broking houses whose commercial relationship with insurers carry some clout in what they demand for bringing the business to them; referred to in the report as “Pay to Play”.
Roger Flaxman, Chairman of Flaxmans, made the following point: “The value of insurance broking can’t be shoehorned into a “one size fits all” proposition. Some policyholders don’t want a broker at all or indeed have never heard of brokers. Others want a broker just to get a price comparison and find an insurer that will have them. Many wiser buyers want an extensive and professional standard of technical advice about risk and insurance coverage options, to make a fair presentation of their risk and making successful claims, and of course there are those in between who often don’t know what they want and so rely on a broker to advise them.”
What skills and resources are required for each of those? Are they acquired, honed and kept up to date by working remotely from home, devoid of the ability to hear look, listen and learn from more experienced colleagues?
The fair price for the value
What is a fair price to pay a broker for the different levels of service? Indeed, should fairness play a part in the culture of broking? Or should it be a case of “buyer beware”? Insurances that pay up to 80% of the premium to intermediaries are criticised by Mactavish but does the typical customer worry about that if they get what they think they need at a price they are willing to pay? Difficult questions to answer, in good faith.
Mactavish also claims that as much as 80% of the broker’s remuneration is paid by the insurer and only 20% by the customer. That, says Mactavish, is a conflict of interest. The question it raises is why is the client not willing to pay what the broker needs, or demands, as the price for doing the job? Therein lies a clue to the broker’s future.
A perfect opportunity for the profession
Flaxman said: “The present circumstances facing the industry are a perfect opportunity for brokers that want to be trusted and valued professional advisors on the complexities of insurance programmes to protect a customer’s business and its place in the economy, to propose a new status and value proposition. That value proposition cannot rely on digital remote communications.”
The key to professional services is knowing how to price the service and get properly and fairly remunerated for the value of what is delivered. That value is in the eye of the customer, not what the broker or insurer might perceive it to be; and that is where the broking profession could usefully re-assess the way forward, post-COVID-19, to attract, reassure and retain its customer base for the next 25 years.
Authored by Flaxmans
The Chartered Insurance Institute (CII), the leading professional body for the global financial services profession, exists to promote higher standards of integrity, technical competence and business capability. With over 115,000 members in more than 150 countries, the CII is the world's largest professional body dedicated to insurance and financial services.
Our membership covers all disciplines within the insurance industry (claims, broking, underwriting), those working in the life and pensions sector, the mortgage advice market and financial advisers (under the Personal Finance Society brand).
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