Brussels turns attention to broker pay as FERMA explains buyer needs

FERMA is currently in talks with BIPAR, the European brokers’ association, to try and find a market solution that would deliver greater transparency on broker remuneration and thus help avoid any potential conflicts of interest ( click for ‘Den Dekker to present buyer case on broker pay to BIPAR’ article).

FERMA and the brokers are keen to find a market solution to this tricky issue, first raised publicly by former New York Attorney General Eliot Spitzer back in 2002, in order to avoid the imposition of rules from the Commission.

The Commission said that it was concerned about the remuneration of brokers and potential conflicts of interest in September 2007 when it published the findings of its Business Insurance Sector Inquiry.

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The Commission stated then: “The report highlights conflicts of interest and lack of transparency in the way that insurance intermediaries are typically remunerated. This raises a number of issues for the functioning of the market and may in some cases lead to less competition and higher prices, especially for SMEs. There is a growing awareness in the market that such conflicts of interest may need to be better supervised or regulated. The Commission is committed to follow up these findings in the framework of the review of the Insurance Mediation Directive [IMD] which has already started. National authorities are also expected to take an interest in the Commission’s findings.”

It was suggested, however, by the Commission and national financial regulators that formal action could be avoided if the market could find an industry solution. Over two years later such a solution has still not emerged and the IMD review is now fully underway.

In a letter written by Jorgen Holmquist to Gabriel Bernadino, Chairman of the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), the Director General of the Directorate General Internal Market and Services suggested that time may be running out for a market solution.

Mr. Holmquist’s letter to CEIOPS forms part of the Commission’s revision of the IMD. The IMD is mainly focused on the retail financial market and, as part of its revision, the Commission says that it is keen to adopt clear conflicts of interest and transparency rules that regulate the distribution of investments package as life insurance policies.

But, Mr. Holmquist also said that he would like to receive advice from CEIOPS on how conflicts of interest could be avoided and transparency improved in the wider market, including non-life and corporate insurance markets. Mr. Holmquist’s words clearly suggested that the Commission intends to act if it is not satisfied that the system works properly.

“As regards the sale of classical insurance policies…the Commission intends to introduce more transparency on the way intermediaries are being remunerated as well as on mechanisms to ensure effective management of conflicts of interest,” stated Mr. Holmquist in his letter.

The Director General asked for specific advice on three key points.

These are: High level principles that CEIOPS would propose for an effective management of conflicts of interest that take into account the differences between investments packaged as life insurance policies and the remaining categories of insurance products;How such principles could be reconciled for all those involved in the sale of insurance products, and How the transparency of remuneration in the sale of policies could be improved for all those involved, taking into account the need for a level playing field.

Karel Van Hulle, Head of Unit at the Insurance and Pensions Unit at DG Internal Market (click for interview ‘The Final Frame’ with Mr. Van Hulle) told Commercial Risk Europe late last week that no formal action is pending.

“No decisions have been taken yet,” said Mr. Van Hulle. “It is, however, clear that the issue of remuneration has received renewed attention following the financial crisis. Once we have received CEIOPS’ advice on this we will decide how to proceed. The questions to CEIOPS have been raised so as to start the discussion,” he added.

Peter Den Dekker, President of FERMA and risk manager for Dutch-based aerospace company Stork, told CRE that he still believes a market solution can be found for the corporate insurance sector at least and that the presentation he gave to about 80 representatives of European broker associations at BIPAR last week had gone well.

“We want to agree principles at a high level between FERMA and BIPAR on behalf of the members’ association members. These should not conflict with any national laws or anti-competitive rules and will prevent the creation of some complex, bureaucratic approach. The agreement would be followed by local agreements between national associations once the IMD has been implemented,” he explained.

“There are a number of key issues that we would like to agree upon. First, BIPAR members should manage any potential conflicts of interest. They can do this by being transparent and through the disclosure of all revenue types. By doing this, BIPAR members can manage any conflict of interest and individual members of FERMA will be able to review that,” continued Mr. Den Dekker.

“There are two types of disclosure requirements. First, the financial information on all remuneration related to the placement and purchase of business insurance. This is not new as this already is required in a number of countries. Second, there would be a disclosure of the source in a general description of the type of remuneration the brokers receive from insurers when it is not directly related to servicing. That is, revenue received from an insurer based on anything other than a transaction such as claims handling. This revenue could be based upon the volume of business placed or profit based and we, the buyers, do not necessarily know, and we need to know,” he added.

Mr. Den Dekker will hold further talks with BIPAR this week and is hopeful that progress can be made quite quickly.