09 November 2017

Commercial Risk Europe: 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 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.

Full article on Commercial Risk (subscription required)

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