Airmic raises concern over broker conflicts of interest

John Hurrell, Airmic

Airmic has raised concern over broker conflict of interest and remuneration, calling for more transparency over how intermediaries operate and are paid.

In a new report, Airmic urges buyers to ensure they better understand how their brokers are paid and asks the market to work with members to allay their fears.

The association flags potential conflicts of interest over broker remuneration, highlighting insurance services brokerage (ISB), the use of facilities and broker relationships with certain insurers as key areas of concern.

The association wants buyers, brokers and insurers to work together to ensure its members get to see the full picture and have peace of mind when dealing with intermediaries.

The report focuses on the remuneration of brokers by insurers. Commission at the policy level is not considered because Airmic members report this is clearly disclosed. The paper, entitled Commercial Insurance Intermediaries – Transparency, Disclosure and Conflicts of Interest, focuses on broker remuneration in the large commercial insurance market, noting that alternative arrangements may be in place for intermediaries operating within the SME space.

The report explains that there is rising concern among Airmic members over broker remuneration agreements. Broker conflict of interest and remuneration models constituted a top three concern in Airmic’s latest member survey. The association explained that members are unclear about the growing range of services provided by brokers to insurers and how they are paid for this work.

The report – which is based on discussions with buyers, brokers and insurers – notes that as brokers look to deliver more on relatively static income from clients, there has been a shift towards increased remuneration from insurers.

“Throughout these changes, Airmic members expect complete transparency from brokers, as this is key to retaining and building trust with buyers,” the report explains. It stresses that buyers are entitled to full information about the relationships between brokers and insurers.

Airmic’s report says the potential for conflicts of interest in contingent commissions is clear and therefore the practice has been discontinued by most major intermediaries across their entire portfolio.

The association says although there have been a few limited examples of the return of contingent commissions in some geographies or classes of business, it is unaware of such arrangements in the market used by their members. Insurance buyers are still advised to clarify whether arrangements of this kind apply to any of their placed risks.

However, Airmic is concerned about payments brokers receive for ISB. Airmic members report that remuneration for ISB, which is essentially a work transfer fee for administration and distribution costs paid by insurers to brokers, is not clearly marked separately from the overall commission received.

It stresses that insurance buyers should be clear about the amount of ISB charged on each line of business their intermediary has placed, and to which administrative services this relates.

For example, the fee could be for developing the contract wording. Airmic says that because the insurer is paying this fee, “there may be a potential conflict in terms of whose best interest is placed at the heart of the contract”. Insurance buyers wish to understand how such conflicts are managed, notes Airmic.

Intermediaries can also charge insurers alternative work transfer charges for other services such as claims management.

Insurance buyers should understand where intermediaries receive ISB or alternative work charges on their placements and clarify the services undertaken, says Airmic.

“This can be compared against the scope of services that the intermediary presents to the insurance buyer in order to clarify where the intermediary is acting for insurer, and where the intermediary is acting on behalf or the buyer,” it adds.

Insurance buyers can ask for ISB to be specifically identified on a separate line on the slip and on the remuneration statement, states Airmic in its report.

Growing use of commoditised market facilities, through which brokers earn additional remuneration and insurers benefit from lower operating costs, is flagged as another potential area of conflict in the report. Airmic is “encouraging members to ensure they understand how insurers are selected and how the facility is tested against the open market”.

Although the benefits of facilities are largely clear for the buyer, particularly where the facility is risk or industry specific, there is potential for conflict of interest that must be addressed to avoid insurance buyers being “influenced towards facilities”, states Airmic.

“Additionally, the underwriting authority given to the intermediary can also lead to pricing conflicts of interest, unless carefully managed. Buyers should be aware of the alternative market solutions and request that these are fully considered. Buyers should also be clear on whether intermediaries have a financial interest in the facility, based on underwriting profitability or claims experience,” it adds.

Georgina Oakes, Airmic’s research and development manager and one of the authors of the report, commented: “It’s really important that risk managers equip themselves with knowledge of what products other insurers offer that rival the facilities they are being recommended. They should make sure that these markets are being considered by their broker too and if not, why not.”

Airmic’s report stresses that enhanced commissions relating to risk placement in a facility should be disclosed to the insurance buyer.

Buyers “should ensure that the percentage commission and the value this amounts to are clearly highlighted on the remuneration disclosure documents provided by intermediaries”, it continues.  Buyers can also ask if the facility requires an upfront fee from insurers, the reports adds.

Strategic agreements between brokers and certain insurers is another concern raised in Airmic’s report.

The fees associated with portfolio services are typically not explicitly linked to volume of business or any individual client account. However, Airmic members have suggested that there may be an implicit link between the fee paid and the volume of business controlled by the intermediary.

The nature of these relationships has the potential to create an “unconscious bias towards the insurers that the intermediary has agreements with over those that it doesn’t, unless managed carefully”, warns Airmic.

Buyers should understand which insurers their intermediary has strategic relationships with and what services are provided, says the association. They should also be aware of other insurers in the market that may well have products and services of interest and relevance to the insured, but about which the broker may be less familiar.

“This assessment should ideally take place several months before renewal to avoid the issue of offers only being made a few days before cover is provided, and preventing the insurance buyer from considering alternative options,” states Airmic.

“Brokers are unlikely, nor are they necessarily obliged, to share details on the sums of money paid by insurers for these relationships. We believe insurance buyers should identify which insurers their broker has these relationships with and – perhaps most importantly – which insurers their broker doesn’t have these relationships with,” commented Ms Oakes.

Airmic is simply asking for transparency over all of these potential conflicts of interest and stresses that it has not taken a view on what business models brokers should or should not use.

“What we care about is whether our members have the full picture to help them understand where the risks of potential conflicts of interest might lie and how these are being managed,” said John Hurrell, Airmic CEO.

As well as calling on buyers to carry out due diligence on broker models and remuneration, Airmic wants all parties to work together to ensure its members get full disclosure.

“It is in the interest of all parties that insurance buyers feel comfortable both with their brokers’ remuneration methods and how they are communicated, and we are therefore confident that the market can work together to ensure complete openness at all stages of the buying process,” added Mr Hurrell.