Broker conflicts of interest ‘rocketing’ in hardening market, warns Mactavish

Broker conflicts of interest are becoming worse in areas of the commercial market that are hardening because payment practices introduced during the long soft period mean intermediaries now receive more and more from insurers, in some instances outstripping remuneration from insureds, warns Mactavish. The insurance governance firm also said a lack of hard-market experience among many brokers and risk managers often means the “blind is leading the blind” when it comes to navigating such practices. “You have a situation today where the amount of income brokers get from insurers is rocketing because of the hardening market. Broker payment mechanisms that emerged during the soft market are becoming a massive conflict of interest in the classes where rates are going up. Remuneration practices that, at the time, didn’t seem so bad because the numbers were so low, are now rearing their head. This is a new story,” Mactavish’s CEO Bruce Hepburn told CRE. “All of the bad things that developed in the soft market are starting to come together,” he added. Mr Hepburn flagged several remuneration practices, but said insurance services brokerage (ISB) is a real area of concern. ISB is essentially a work transfer fee for administration and distribution costs, paid by insurers to brokers. It is charged as a percentage of premium. Back in 2017, Airmic published a report flagging potential conflicts of interest over broker remuneration, including ISB. The association and its members were worried that ISB was not clearly and separately marked from the overall commission received. The report, which was based on discussions with buyers, brokers and insurers, warned then of a shift towards increased broker remuneration from insurers as intermediaries looked to deliver more from relatively static client income. Mr Hepburn believes this shift is now becoming a real problem as parts of the market harden. “We have seen instances in certain lines such as D&O, construction and professional indemnity where the premium has more than doubled. Say a broker is on a fixed fee from the insured and gets £50,000 for a £1m premium. If that premium doubles, the broker still gets the same sum from the insured. But if ISB is 3.5%, for example, the amount the broker receives from the insurer goes from £35,000 to £70,000. So total remuneration is about £120,000, of which about 60% comes from insurer. These are real cases. We have cases now where two thirds or more of income is coming from the insurer. Can this be right?” said Mr Hepburn. He stressed that the work brokers do on behalf of insurers for ISB does not double when the premium doubles. “So, the broker delivers a doubling of the premium and gets a bonus,” he added. Mr Hepburn also warned that many senior brokers and insurance buyers have no experience of hardening market conditions and therefore struggle to deal with new situations they face today. In the end, it is the insured that will carry the can, he continued. “The blind is leading the blind. But the fall guy is going to be the insurance manager. They must explain that premium has doubled, cover is restricted, the deductible is higher and limits down. How are they going to sell that to their boards? Insurance managers face a massive risk that their credibility will be in question,” said Mr Hepburn. The comments follow an interview with CRE last week in which Mactavish’s CEO warned that conflicts of interest across commercial insurance are creating an “unhealthy” market. The company told CRE that it will soon publish additional evidence of flaws it has found in several lines of insurance, to spark debate in a market it said suffers because too few people are willing to speak up on behalf of buyers. Mr Hepburn also said some insurance managers are guilty of getting too close to insurers and brokers. As a result, they are failing to provide adequate scrutiny of market practices and insurance arrangements, he added. In addition, the firm has promised to publish in-depth evidence of eight fundamental flaws it found in London and UK market cyber policies. It has challenged the insurance market not to deny claims because of these problems, and invited various industry players to participate in an open forum on the topic.

Broker conflicts of interest ‘rocketing’ in hardening market, warns Mactavish

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