Brokering a solution to insurance costs

Insurance brokers have been riding their luck over the past few years, in more ways than one. Until this week, they had successfully managed to stay on the sidelines of the continuing controversy about the cost of motor and liability insurance, writes John McManus

But on Wednesday they were thrust centre stage by the Competition Authority, which firmly identified them as the villain of the piece in its report on the 18-month investigation into competition issues in the insurance industry.

Perhaps the most telling fact highlighted by the authority is the extent to which brokers have, in effect, profited from the rise in insurance premiums.

According to an analysis done for the the authority by Dorothea Dowling, chairwoman of the Personal Injuries Assessment Board, the commissions paid by the insurance industry to brokers rose faster than premiums in recent years.

Commissions paid in respect of motor insurance business rose by 51 per cent to €76 million between 2000 and 2002, while commission paid in respect of liability insurance climbed by 126 per cent in the same period to €58 million.

This compares to increases in the overall value of the business written by insurance companies of 21 per cent (to €1.6 billion) for motor insurance and 94 per cent (to €600 million) in the case of liability insurance.

The reason, according to the authority, is that brokers' commissions remained fixed despite the huge surge in the price of premiums. As a result, brokers continued to get the same proportion - 5 per cent of motor premiums and 9 per cent of liability premiums - of a much larger pie.

Commission rates did not fall for several reasons, the main one being that the insurance companies did not attempt to push them down because they depend on brokers for up 80 per cent of their motor business and 95 per cent of their liability business.

The other reason that brokers' commissions did not come under pressure, argues the authority, is that there is a lack of transparency about how brokers operate, which makes it hard for consumers to shop around.

It remains to be seen whether the authority is correct in its analysis - it has just started a two month consultation period. But if it is correct, finding a solution will not be easy.

The most obvious solution would be to go down the road of more regulation.

Fixed rate or ad valorem commissions could be banned and brokers obliged to provide more information about the structure of commissions.

Under the Irish Financial Services Regulatory Authority (IFSRA) code for brokers, brokers are already required to provide a "reason why" letter, which sets out the reason why they recommend a product.

They must also issue a "terms of business" letter, listing the companies from which they hold letters of appointment.

IFSRA inspects brokers - on a targeted and random basis - to check that these letters are supported by backing documentation.

Pension and liability brokers are not currently required to disclose their commissions or fee structures, but the consumer director of IFSRA, Ms Mary O'Dea, is investigating whether she has the legal powers to demand disclosure, according to a spokesman.

IFSRA is currently reviewing the whole area of fees and transparency and hopes that its review will dovetail with the Competition Authority's investigations.

The authority, however, has cautioned against further regulation of the sector, which is already highly regulated, albeit from a consumer protection stand point.

Before the Central Bank (and subsequently the IFSRA) taking over regulation of the sector in 2001, there were up to 9,500 companies and individuals listed as selling insurance products.

This has now fallen to around 2,500, but IFSRA points out that many on the original list of 9,500 names were not active in the market, and there was a significant amount of repetition.

Without a doubt, however, a significant number of players decided to exit the market on foot of the more stringent regulatory requirements.

The Competition Authority's fear is that more will now decide to leave if the regulatory burden is increased, thus reducing competition.

The authority is also opposed to the other possible remedy, which would be for the insurance companies to drive down commissions, as has happened with air travel.

This would require collusion by the insurance companies as no company could be expected to act unilaterally given their dependence on brokers for business.

This type of cartel action would be anathema to the Competition Authority.

Copying Ryanair and forcing a migration by customers from intermediaries to direct sales via online booking is not possible as no insurance company is clearly positioned as a low-cost operator.

Most of the large insurers already offer direct sales either by phone or internet, but still obtain most of their business via the broker channel.

The Competition Authority's preferred option would be for consumers to "vote with their feet", according to Mr Colm Treanor, the case officer responsible for the investigation of the insurance industry. The authority is hopeful that, as a consequence of the issue of brokers' commissions being highlighted, consumers will try and bargain with brokers.

Mr Treanor is not so naive as to think this week's report will spawn a consumer revolution, but he is hopeful that it will provide ammunition for the campaign being fought by small and medium-sized businesses.

If a critical mass of businesses start negotiating commissions and seeking better value from brokers, this could have a wider impact, he suggests.

The advocation by the authority of a remedy compatible with competition theory is not surprising, but it does not look robust enough to head off further regulation by IFSRA.