More clarity over broker remuneration would give major insurance buyers more confidence that they are getting best advice and best value for money, explains David Gamble.
Customers buy products nowadays in reputable High Street stores with a degree of confidence in the manufacturing standards, quality control and after-care service which they can expect. They make their purchases because they believe they get value for money, and much of this belief is based on public knowledge that there are well established legal regulations and enforced controls on production processes and sales procedures.
It is as simple as a can of beans. If the can says it contains 420 grammes and lists its point of origin and final ingredients to 0.10%, then that is exactly what you expect to buy. If you do not believe the product meets its billing, you can take the matter up with the maker at least from a common point of understanding.
So, why can't things be as simple when it comes to buying services and, more precisely, buying insurance broking services?
Value for money?
The fact is that insurance buyers are concerned about broker remuneration practices. These "customers" are worried that they may not be getting best advice and value for money. The UK risk management association AIRMIC, whose members make up a large proportion of these customers for insurance products, particularly the big buyers, has been calling for clarity on this issue for some months.
Although a number of brokers argue that there is no groundswell of opinion on the side of greater transparency, within our membership there is certainly an increasing realisation of the importance of understanding exactly what benefits brokers are getting and what agreements are involved, so as to be able to monitor their advice properly.
A survey of the association's members at their annual conference in March revealed that less than 4% of risk managers have any real knowledge of incentive payments made to brokers by insurers. None of the risk managers believed that brokers revealed their total commission and incentive payments.
The broking and insurance industries need to reaffirm the confidence of customers in the products and services they buy and the way that they do so.
Code of conduct
This is why AIRMIC is supporting the establishment of a global code of conduct on such payments. We have even prepared our own draft code of conduct, details of which have been sent to the UK Treasury for consideration within its current remit to reform insurance broker regulation.
It is pleasing to see that general industry consensus towards the implementation of such a code, but words need to be converted into action. The code will be worth little without statutory teeth to fine or expel brokers and other intermediaries for breaches. It would also be advisable to appoint an impartial, independent regulator to ensure customer confidence in the code.
Are we over-reacting? Here is some impartial opinion. In the 29 June issue of the National Underwriter, editor Sam Friedman writes: "I do not believe contingency fees should be outlawed. But I would entertain suggestions about mandatory disclosure. It seems unethical at best, and illegal misrepresentation at worst, to pass yourself off as an honest broker without telling your customer that the supplier of a product or service is paying you a fee to place more or better business with them. The least a broker should do is alert the customer to this possibility. Failure to do so seems sneaky and underhanded.
"Brokers are on the losing side of this philosophical debate. And the more they argue the point with increasingly suspicious risk managers, the more it looks as if they have something to hide.
"It is really time for brokers to ask themselves one key question: Just who are you working for anyway? If it is the risk manager, as it should be, then the risk managers should be alerted if any money is changing hands outside that relationship," adds Mr Friedman.
Broker transparency is an important issue to risk managers, for without it the fulfilment of their own professional duties is restricted. A key role for today's risk managers is to be able to compare and evaluate fully the cost of products and services provided by industry suppliers. Improved knowledge leads to better decision making.
The customer is concerned about present arrangements, and there is evidence that such concern is not unjustified. In the latest annual report of the Insurance Ombudsman Bureau (IOB), the ombudsman Walter Merricks says that the IOB had to turn away more than 10,000 people last year because their complaints were about a broker or insurance intermediary rather than an underwriting company or insurer.
The IOB has now opened its doors to all sectors of the industry, providing a one-stop shop for all general insurance complaints, and an opportunity for brokers and intermediaries to demonstrate their commitment to customer service.
Greater transparency will help alleviate many concerns, allow risk managers to assess conflicts of interest in the market and make suitable decisions. Improved regulation within the broker and intermediary sector will resolve many risk management doubts, and early action to clarify contentious matters will restore a happy equilibrium to the industry in general.
David Gamble is executive director of the UK risk management association, AIRMIC. Tel: +44 (0) 171 480 7610. Fax: +44 (0) 171 702 3752.