FCA opens can of worms by launching inquiry into wholesale broking practices

The UK Financial Conduct Authority (FCA) has officially launched a market study to assess how competition is working in the wholesale insurance broker sector. This potentially opens a whole can of worms that could force the London market, in particular, to radically reassess how it carries out business. The European Commission (EC) also confirmed that it has taken over an inquiry launched by the FCA earlier this year into the workings of the aviation insurance market. An EC spokeswoman reportedly said this was because of “possible anticompetitive practices” alleged in aviation and aerospace insurance and reinsurance broking products. Both investigations appear to have been sparked by a common theme: the soft market. When rates are low and it is a buyers’ market, brokers that have significant market share grasp the opportunity to make more commission from insurers and reinsurers desperate for volume. This bargaining process that takes place between brokers and insurers is not carried out for the benefit of consumers. It is about maximising profits. The FCA and the EC have a remit to protect the interests of both corporate and individual consumers. The FCA said it wants to ensure the broking sector is “working well, and fosters innovation and competition in the interests of its diverse range of clients”. The UK regulator pointed out that the London insurance market is one of the world’s leading centres for large-scale, complex commercial and specialist risks, and controls more than £68bn in gross written premium. The FCA inquiry is clearly focused on broker facilities that have mushroomed during the persistent soft market, driven by the big global brokers. These facilities deliver cost savings for customers, but also force insurers to give the brokers higher commissions because of the volume delivered. The big question is whether such facilities are designed to obtain a better deal from customers or just bloat brokers’ commissions and, at the same time, encourage blind underwriting. The insurers are forced into a corner in such a competitive market and must agree as they desperately attempt to maintain volumes. The FCA has clearly been alerted to this problem and potential conflict of interests by insurers. A number of leading insurance executives have recently raised serious concerns about the rise of facilities and broker power. Evan Greenberg, chairman and chief executive of Chubb, wrote in his annual letter to shareholders back in April that the soft market had led to “abusive behavior” by some brokers that “enrich themselves at the expense of both their customers and underwriters”. “These predatory behaviours, which have shown up around the world and in London in particular, are simply unsustainable from an underwriting perspective and will come back to haunt these brokers,” Mr Greenberg wrote. Ed Noonan, chairman and chief executive of Validus, recently told Insurance Day newspaper that he is really worried about the rise of facilities and broker power in the soft market. “I find it very difficult to believe this was somehow a way to deliver a better price to the customer. We were doing a very good job of beating prices down in the market every day…It’s a soft underwriting market so underwriters are feeling pressure to maintain their revenues and therefore they are caving into these demands,” he told the newspaper. The FCA has obviously been less emotive in its language, but one suspects the content of submissions to the consultation from insurers will make for interesting reading. For now, we have to ponder on the official words of the FCA. “There have been significant changes in the wholesale insurance sector in recent years, which has seen brokers developing new services and business practices. The FCA plans to explore how competition is currently working and whether it could work better. The FCA believes that effective competition contributes to ensuring London remains an international centre for insurance,” stated the regulator. Christopher Woolard, FCA executive director of strategy and competition, said: “Given the size of the wholesale insurance sector and the type of large scale risks it covers, the way it functions can have a wide-ranging impact on the broader economy. If businesses cannot get appropriate cover or pay more for services than they should, it can impact on their ability to operate and grow. Brokers play an important part in the wholesale insurance sector ensuring clients get appropriate coverage at good value. However, following significant changes in the sector, we are looking at the dynamics to ensure competition is working well.” The FCA added that it will use the study to: Look at how brokers compete in practice and whether they use their bargaining power to get 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. The market has been invited to give its views by 19 January 2018. The FCA also wants to hear from the ultimate customers – risk managers. So readers of Commercial Risk Europe should pen their thoughts to ensure their perspective is heard. Send your email to wholesaleinsurancebrokersmarketstudy@fca.org.uk or write to: Wholesale Insurance Broker Market Study Team, Competition and Economics Division, Financial Conduct Authority, 25 The North Colonnade, London E14 5HS.

FCA opens can of worms by launching inquiry into wholesale broking practices

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