The curse of serving two masters...
The redraft of the EU’s Insurance Mediation Directive (IMD) was released by the European Commission this week and on the face of it, confirms insurance brokers’ worst fears regarding mandatory commission disclosures.
It had been feared that a ‘one-size-fits-all’ approach, based on political pressure around transparency in financial transactions throughout the EU, would colour the final draft and this seems to be the case. Or is it?
I have always felt that the traditional broker remuneration model – especially in the non-life insurance arena - is inherently flawed, filled with inconsistencies and openly supports conflicts of interest. As such, the Commission’s draft - promoting mandatory remuneration disclosures - goes a long way to addressing such issues.
The Commission notes that the proposed “mandatory disclosure of remuneration should have positive effects on competition in insurance distribution as it would ensure that consumers receive wider information on products and costs, as well as possible conflicts of interest”.
It is in the area of ‘conflict of interest’ that the IMD draft will provide consumers with much needed transparency. The current (and generally accepted) practise is such that an insurance broker earns a commission from the insurer as well as charging a ‘service fee’ to the policy owner for the same policy sale. Whom does the broker believe he is representing in such a dual-arrangement? Is he an agent of the insurer (and so earns a sales commission) or an agent of the policy owner (and so charges a fee for finding the right product)?
If you accept that the independent broker is an agent of the policy owner (which the law of contract would suggest he is), then the broker should only be remunerated by their client and receive nothing from the product supplier. This obvious conflict of interest is further complicated by the larger global insurance brokers whom, in addition to local commissions and brokerage fees also receive contingent commissions linked to the volume of business they supply to an insurer. While such secondary commissions for global brokers such as Aon, Marsh and Willis where attacked by Eliot Spitzer in 2006 and so become unpopular, the very same practise - under the guise of ‘leveling the playing field’ for all brokers - has now reappeared putting the onus on the buyer to request full disclosure. This approach to disclosure is fine if you are a large commercial insurance buyer but a typical consumer, unfamiliar with the nuances of the industry, would be oblivious to such ‘bulk-buying’ arrangements and so full disclosure on a simple motor or household insurance sale, in reality, never takes place.
Why has it been acceptable practise for so long for insurance brokers to ‘double-dip’ in this manner? As a broker cannot and should not be allowed to serve two masters the draft IMD will not only create the much needed transparency around insurance sales for all consumers but should also force a re-think within the broking industry as to whom they regard as 'the client’ in the transaction and limit remuneration from only that client.
If the insurance broker, and the services they provide, are truly valued by the buying public then the net-of-commission/fee only model is the way forward for the industry as a whole. If not, then the personal lines broker is unlikely to survive the continued rise of aggregators and other such direct sales channel once the new IMD regulations become law.
Under the draft IMD, the industry has a proposed transition period of up to five years to secure its future. Will it put its money where its mouth is, grasp the nettle and work proactively to restructure a now outdated business model or will it react to the draft IMD - as did BIBA in the UK - by bemoaning a ‘new world order’ that demands full transparency in all things financial?
The draft IMD, if fully implemented, will no doubt promote a sea change within the industry where the interests of the broker, insurer and policy owner are finally aligned. As such, it should be welcomed by all.