FERMA responds to EC competition inquiry into business insurance

The Federation of European Risk Management Associations (FERMA) has told the European Commission that the level of transparency of broker commissions is still “not entirely satisfactory,” more than two years since FERMA proposed a code of practice for brokers.

These comments come from FERMA’s response to the Commission’s competition inquiry into business insurance.

FERMA argues that the practice of disclosure is very uneven. The market operates in a complex way and on a worldwide basis. While major broking firms have been pushed by their US headquarters to be more transparent, there is still strong opposition to the disclosure concept from a large majority of the rest of the market. FERMA was not able to get brokers to sign up to its code of practice.

FERMA has told the Commission that where there is disclosure, its content is often vague and unclear as to the nature of intermediaries’ direct remuneration, while contingent commissions, payments from insurers based on account value, are rarely revealed.

Although FERMA does not believe that the level of commission would lead professional brokers to recommend an insurer against their clients’ interests, it fears that it could affect the way they advise clients on, for example, choice of policies or wordings. “Commercial insurance is not a uniform product, and the buyer has to use judgement to get the most appropriate coverage. To do that he or she needs impartial advice,” Thierry van Santen, FERMA’s spokesman on competition matters, explained.

There is also the issue of distortion of competition. FERMA told the Commission, “It is obvious that the first objective of transparency is to bring confidence between brokers and clients, but also to certain extent, it should help improve the efficiency of the market. The industrial risk market and the broker firms have a long way to go to improve their efficiency. True transparency, which allowed the customer to make like to like comparisons, would oblige the players in the market to make significant efforts on processes and quality.”

“Commercial insurance is not a uniform product, and the buyer has to use judgement to get the most appropriate coverage

Thierry van Santen

FERMA has proposed that

• Any transaction should show the level of remuneration paid by the insurer to the intermediary

• The function of the intermediary should be distinguished according to whether it is acting as a broker with remuneration paid or agreed by the client or as an agent where it is providing a service for an insurance company, which role would need to be clear to the client.

• Reinsurance commissions could create some conflicts of interest and a European regulation could require strict separation of reinsurance intermediation from traditional brokerage services.

• Additional incentives given by some insurance companies to brokers should be strictly restricted.