FCA launches insurance brokers market survey

On 8 November 2017, the Financial Conduct Authority (FCA) launched a wholesale market study to assess how competition is working in this sector. The study will explore market power, conflicts of interest and broker conduct and has the potential to introduce remedies to address any perceived problems. Those in the market have an opportunity to help steer direction of travel.

The FCA’s study will:

  • Investigate how brokers compete in practice and whether they use their bargaining power to get their insured clients a good deal.
  • Assess what conflicts of interest exist, how they are managed and how they affect competition and client outcomes.
  • Examine how broker conduct impacts on competition in the sector.

Background

The FCA’s last probe was conducted 10 years ago and the regulatory body say that significant changes in the sector have prompted this current review.

In 2007, the FSA had been concerned about the commission and fees charged by insurance brokers, the perceived lack of transparency and the potential for conflicts of interest between broker and client. To resolve these issues, it proposed mandatory disclosure of commission to commercial customers, although following discussions with trade associations, insurers and intermediaries, the FSA decided against the compulsory option. It also issued guidance in other areas, as opposed to issuing rules with mandatory compliance.

The FCA’s current concerns

The FCA is now concerned that the soft market and loss of capital available to underwrite claims since the financial crisis has led to premiums remaining low, which has caused brokers to find other ways of making money.

This may have resulted in brokers making increased use of facilities and offering additional services, which has the secondary effect of restricting competition.

The investigation

The FCA’s review covers insurance and reinsurance for large, complex and specialist risks placed by brokers in the London market (Lloyds as well as company), focusing on (i) retail micro-enterprises and SMEs where those risks are pooled together and placed on the London Market and (ii) corporate clients that are based in both the UK and overseas.

The market study will explore

  • Market power
    • Whether the possession of market power by individual brokers is restricting competition?
    • Are brokers using market power to get insurers to sign-up to facilities/sign up for additional services or pay disproportionate commission?
    • The extent to which insureds can switch broker (the switching rate 10 years ago was less than 10% per year).
  • Conflicts of interest
    • Does the lack of information available to insureds lead to a conflict of interest?
    • Are brokers placing business within facilities, which yield better remuneration but may not always be within the best interests of insureds? (Facilities are where a broker asks an underwriter to commit capacity or write certain types of risk upfront and they then create the placement offering, without the insurer necessarily having visibility of the underlying risk.)
    • Do brokers direct insureds to insurers who provide the broker with the highest or contingent commission, or to whom they provide with additional services e.g. data analytics or advisory services?
    • Do brokers insist that any reinsurance is placed with the same broker?
    • Do brokers tend to place risks written by MGAs owned by the broker’s parent company to retain a greater share of the premium?
  • Broker conduct
    • Does the operation of facilities, or selection of associated MGAs, lead to certain insurers being excluded?
    • Do brokers explicitly reach agreement or tacitly coordinate with each other on pricing, the sharing of information and terms?

Implications for the market

If the FCA concludes that there is inadequate competition, the remedies available to them include:

  • Launch an official investigation.
  • Refer the matter to the Competition Commission.
  • Impose market wide remedies e.g. rulemaking, publishing guidance, proposing self-regulation.
  • Firm specific remedies e.g. cancelling permission, public censure, financial penalties.

What the market can do

The FCA is asking interested parties to submit their views on the topics identified as needing investigation by 19 January 2018 via email or letter. They expect to publish their interim report in autumn 2018.

The review of 2007 demonstrates the impact that the market can have on the FCA’s decision - making if they engage with the FCA during this process. Accordingly, we urge those implicated by the review to respond.