Comment/Diarmuid Kelly: The Professional Insurance Brokers Association (PIBA) has been forced to lodge a formal complaint to the Competition Authority after its report branded brokers "parasites" in the media.
The report, published in February, marked the beginning of a public consultation process and was undertaken to try to identify anti-competitive practices.
PIBA was given no advance warning of the contents of the report and by the time I returned to the office after receiving it there had already been three messages from journalists. PIBA was not given the opportunity to do a full analysis of the report yet had to remain vocal and defend brokers in the media. The Competition Authority is now silent following our formal written response.
PIBA commissioned an actuarial consultant to examine the data in the report. We discovered a number of serious inaccuracies with its findings, not least of which was gross miscalculation of commission rates.
Our submission to the Competition Authority has raised these inaccuracies, and questions the validity and accuracy of the report, which we believe has tarnished the good name of brokers. Indeed PIBA has questioned the very integrity of the report.
It would appear that the Competition Authority made five fatal flaws.
The first (and perhaps the most basic) flaw was that it didn't even understand the term broker and, therefore, misused it throughout its report. It grouped all intermediaries together including tied agents and, more appallingly, the direct sales arms of insurance companies.
The authority's report confirms that there is massive confusion over the new "multi-agency intermediary" classification by the Irish Financial Services Regulatory Authority. This distorted data and had the effect of transferring insurer sales costs to intermediary sector commissions.
It seems that the authority took everything that is known to economics, i.e., the principles of competition and profit-maximisation, and assumed that it didn't apply to the broker sector. Its perverse economics hypothesis assumed that brokers would behave in a way that would put them out of business.
The sensationalism that the report stirred was based on the increases in commission. The authority used figures from Dorothea Dowling's report, which calculated the premium figures incorrectly. Instead of using gross written premium, which takes account of reinsurance, it based its figures on net written premium. This is seriously out of line with market reality. A different picture is painted when the correct figures are used.
It would also appear that the authority collected data on brokers from everyone but brokers themselves. PIBA criticised the methodology of the Competition Authority in that it made accusations about brokers without receiving any input from them. PIBA believes this is against natural justice and highly unusual behaviour for a public body.
The authority used an expensive London-based economics firm, whose total bill was 160,000, and it was deemed too costly for this firm to meet Irish brokers. Why did it not employ an Irish economics firm?
PIBA believes that the authority found little of major public interest about insurers, who coincidentally massively increased prices and profits during the 18 months of the study. Did it decide to sensationalise its "findings" on brokers based on poor quality statistics and questionable research methodology to obtain headline news?
Furthermore, the report was littered with incorrect and incomplete analysis of the regulations that apply to insurance brokers in the State.
Its findings were released into the public arena without it having researched and substantiated them with rigorous empirical data. The report seemed to favour insurance companies and major wholesale brokers over our members, who are generally small to medium-sized brokers.
The question of who is behind the rise in insurance costs and how to ensure that these costs do not spiral, was not touched on in the report.
PIBA expressed its concern to the authority and is seeking a meeting with the Department of Enterprise, Trade and Employment, which co- funded the study. We would welcome a proper study of the insurance market.
We would also welcome the introduction of similar measures to the life-transparency regulations for the non-life sector. This would include commissions, overrides, and bonuses and commission-equivalent costs for direct writers. If coupled with the introduction of regulations that would require the disclosure of insurer solvency ratios, then the consumer would no doubt greatly benefit and confidence in the industry would be returned.
PIBA co-operated fully with the authority prior to the publication of the report and sees no obstacle to continuing in this fashion. It wants to see a full, comprehensive study of the industry completed that shows no bias to one sector to the detriment of another, i.e. less of a witch-hunt and more of a factual analysis.
We hope that, as we have expressed our concerns at the preliminary stages, the final report will embody the principle of fairness whilst also reflecting an awareness of economics and market reality.
Diarmuid Kelly is chief executive of the Professional Insurance Brokers Association
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