17
Examination of witness
Graeme Trudgill.
Q58 The Chair: Welcome to today’s meeting, which is the fifth oral evidence session as part of today’s committee inquiry into the regulation of consumer insurance marketing. Thank you very much to Mr Trudgill for attending. The session is open to the public. It is broadcast live and is subsequently accessible on the parliamentary website. A verbatim transcript will be taken of the evidence and will be put on to the parliamentary website. Could you please introduce yourself for the record, Mr Trudgill? I believe you will be making a brief opening statement.
Graeme Trudgill: Thank you, Chair. I am chief executive of the British Insurance Brokers’ Association, BIBA, and I am a former insurance broker specialising particularly in consumer insurances. Thank you, members of the committee, for inviting us to give evidence on the regulation of consumer insurance, which provides essential financial resilience for millions of households. Insurance brokers are primarily the agents of the client, and their business model puts consumers’ best interests at the centre of everything they do.
Let me begin with a central point from our written submission. The insurance market is fundamentally working well for most customers, but we know there are areas to work on constructively together to achieve higher claims acceptance rates. Currently, there is too much focus on price as opposed to the suitability of the insurance for that specific customer’s needs. This is evidenced by firms being called price comparison sites. Concentrating on price alone can lead to a protection gap, and cheaper policies frequently achieve their price by stripping out cover, which may be fine for some but not for everyone who buys them.
Insurance brokers help by ensuring suitability, explaining disclosure requirements and exclusions, and supporting customers through claims. The majority of consumers buy online without advice. We estimate around a third of consumers use an insurance broker. Speedy online purchases are where misunderstandings can arise, particularly around disclosure obligations, which remain poorly understood, despite being central to whether a claim is paid.
A key question that needs answering is which distribution channel’s sales process is causing the majority of claims rejections. The FCA is currently conducting an analysis of this, and it is vital that we know the answer so that we can tackle the cause. We very much support effective regulation—for example, with 5,000 upheld ombudsman complaints from around 20 million travel policies sold in a year, it does offer strong consumer protection.
In closing, our recommendations focus on practical, proportionate improvements: for the FCA to identify the cause of claims rejections; for the FCA to reduce unnecessary regulatory paperwork for consumers so we can focus on what will help them make an informed decision; for the industry to streamline policy documentation with plain English, plain numbers and low reading ages; and to improve online journeys with clearer prompts around common issues, such as what the most common causes are for declined claims. Our aim is straightforward: to ensure that home and travel insurance customers have positive claims outcomes and insurance that meets their needs. Thank you.
Q59 The Chair: Thank you very much, Mr Trudgill. Can we start by trying to get a sense of the market? For insurance brokers, how much of their business is in general insurance for consumer segments compared with life protection segments and business segments? How big are brokers within that?
Graeme Trudgill: Overall, we have about 1,800 insurance broker members of BIBA, and they place around £150 billion of gross written premium. That includes commercial insurances. Of that, if we look at the personal lines proportion, we believe about £9.1 billion of gross written premium is written through ABI members. If you add non-ABI members and Lloyd’s markets and the like, we believe about £16 billion of gross written premium is written through insurance brokers. We think we represent about a third of the personal lines market, bearing in mind there are other distribution channels such as direct insurers.
The Chair: You are handling roughly a third of the personal lines. Can we break down the two-thirds?
Graeme Trudgill: The two-thirds will be split through direct insurers, who represent a significant amount—I do not know the exact percentages, but the ABI would probably be more accurate on that, or the FCA itself. You would have direct insurers, then products sold on price comparison sites—of course, you are not buying the product from the comparison site; you are buying it from a broker or an insurer. A good deal of travel insurance and home insurance is sold via banks: when you arrange your mortgage, for example, you might arrange your buildings insurance at the same time, because that would be a condition of the mortgage.
Many package bank accounts include free travel insurance. A good deal is sold through that channel, although we do have some reservations about the suitability of those products for consumers. We can come to that later if you wish. Travel agents sell a good deal of travel insurance. There is an issue there in that for connected travel insurance sold in connection with a holiday, when you buy the holiday, if you buy travel insurance with that, if the premium is under £500, you (the seller) do not have to be FCA regulated. We think a customer should get the same protections wherever they go.
That would be something that would be helpful to look at. It (the premium threshold) used to be below £200, but when the IDD came in, that went up to £500. Then there are other affinity schemes and white-label schemes where, if you are a member of the National Trust or other affinity schemes, you might buy through that source.
The Chair: I think the answer is that I cannot have a simple answer to my question.
Graeme Trudgill: I do not have the exact statistics for each channel.
The Chair: Have there been major shifts over time?
Graeme Trudgill: Yes, there has been a shift in distribution. The focus has been very much on a move to self-service, where people go and click and buy, and perhaps do not get the advice they used to get from a broker. There is a focus very much on price—they are called price comparison sites, not suitable insurance comparison sites.
The most recent change is on speed. You often hear people saying, “We can ask you three questions and get an insurance quote”. People even ask AI—various AI brands—giving their number plate, age, and postcode for a car insurance quote. That shift brings with it risks. With our members, with insurance brokers, we make sure we do our best to do the suitability test of demands and needs, so we are comfortable that the client has the right insurance product suitable for their own particular needs.
Yes, there has been a shift. Right now, price comparison sites are very dominant, but my understanding is that AI is now climbing up the charts. We believe that potentially up to 14% of consumer questions when they are looking for quotes can begin with AI.
Q60 Lord Lilley: Mr Trudgill, could you tell us how brokers and online price comparison sites are remunerated? Does that in any way restrict the scope that users of one or the other receive in terms of the breadth of the market they may be addressing?
Graeme Trudgill: If a broker has a product on a comparison site, or an insurer has a product on a comparison site, they will have to pay a fee. That may be a fee per click when a client clicks on to that particular provider’s product, and then a final fee if that product is sold. The fees will vary depending on the class of insurance and the particular sites. They are quite significant, and I believe those fees would take out the vast majority of a broker’s commission, leaving a very small margin for products sold on comparison sites.
Q61 Lord Lilley: I happen to use a broker, and I have never thought—how is she remunerated?
Graeme Trudgill: How is a broker remunerated? There are predominantly two different models. They might work on a fee basis, so they just have a fee. They might work on a commission from the insurer, where if the product is sold for, say, £100, perhaps they get 10% commission, so they would keep £10, and the insurer would pay that.
The commission model is very helpful to consumers because it means they can get quotes for their insurance from 10 different insurance brokers. Those brokers can each go and look at many different choices of insurance market, and there is no cost whatsoever for all that work until the client decides to buy a particular product from a particular firm. At that point, the commission becomes due.
Of course, brokers have to operate within the FCA’s fair value rules, which are very strict. They have to be able to explain to the client or the regulator why that commission is fair value, and they have to explain to the insurer why the commission they are taking is fair value. There is a lot of regulation around that. Brokers are usually very good at demonstrating the value that they offer. If a claim occurs, the broker will also come in and do an extensive amount of work on that to support the client as well.
Lord Lilley: Could you outline how insurance distribution is regulated, and what the demands and needs requirement is in the FCA’s insurance handbook?
Graeme Trudgill: There has been a significant amount of new regulation for insurance brokers since the end of 2018. We have demands and needs, as you say, which is the ICOB—insurance conduct of business rules—5.2. We also have the insurance product information document in ICOB 6. We have general insurance pricing practices, ICOB 6B. We have product governance rules on fair value. Now we have the consumer duty: that 12th principle, which includes consumer understanding.
Those are five relatively new, massive—each one in its own right is a significant piece of regulation. On ICOB 5.2, demands and needs that you asked about, there are three key elements. First, the sale of a contract of insurance must always be accompanied by a demands and needs test on the basis of information from the customer.
Second, when proposing a contract of insurance, a firm must ensure it is consistent with the customer’s insurance demands and needs. Third, the firm must give the customer a record of all the demands and needs that were discussed. You are testing, checking and evidencing. Brokers have to do that with all their clients. It is an effective piece of regulation.
When it comes to claims, there is significant regulation in ICOB 8: you must handle claims promptly and fairly; you must provide reasonable guidance to help a policyholder make a claim; you must not unreasonably reject a claim, which is more for the insurer side; and you must settle claims promptly. The rules that have come in in recent years are very effective and very supportive of consumers. We are the agent of the client. We very much support quality and proportionate regulation. I hope that gives a good overview for you.
Q62 Lord Smith of Kelvin: You have spoken about what brokers actually do, explaining policies, and so on. I would like you to expand a little on what they do when claims are being made. How do they interact with the client then?
Graeme Trudgill: The broker’s opportunity to help a client with a claim is the most important point of all, because that proves why they are there to support them. They would work with the client to understand what has happened but first make them safe. If the client is abroad, they would make sure they have the details of a local hospital where they could get help. They would contact an emergency assistance service that may need to send an ambulance.
If it is a home insurance policy—say a flood—they would immediately contact the insurer and the loss adjuster. They would go out, meet the loss adjuster at the client’s premises, and make sure the client had instructions about safety: being careful around electricity if there was flooding, being careful of infected carpets if the damage is from sewage water. They would go through that whole process with the loss adjuster and make sure that the insurer was responding quickly.
They would make sure that damaged property items were photographed and recorded to evidence their value to the insurer. They would make sure those items were disposed of safely, then work with the insurer to dry out and disinfect the property and make sure it was safe. In the meantime, they would work with the insurer to make sure the client had suitable accommodation while the property was being made safe, which could be many months while it dries out and is then redecorated.
They would need to make sure that the right values were paid for damaged contents, and there would be quite extensive work in logging all that information with the client and making sure the loss adjuster was doing things correctly, making sure the right values were paid for jewellery items, for instance. Can items be restored? A laptop might have been underwater, but there are specialist firms that can still restore it and recover the data. Throughout that claim, the broker would be the client’s advocate.
If it were a motor claim, and the vehicle was a total loss, they would be representing that to the insurer, to show how they could get the best offer for the client as they could. They would be making sure that they would say if it had leather seats, if it had a full service history, what condition it was in. All that information would be packaged up by the broker when the client makes the claim, to ensure those claims were paid quickly, were not denied and were paid to the best amount.
We have guides that our brokers use with clients—how to make a travel claim, how to make a home claim—we have a whole series of these guides because we want to make sure that notifications are done in the right way, and nothing is forgotten. We very much want to hold the hand of the client and make sure that the claims outcome is the best that they can get.
Q63 Lord Sharkey: The work you described the broker as doing after a claim sounds as though it could be very arduous and perhaps take a long time. Who is paying for that time?
Graeme Trudgill: That is part of the broker’s job. We are there as the agent of the client to support them throughout that claim. Brokers have claims teams who are there to help. They are specialists. They have the hotline to the insurance companies’ claims departments. It is part of what we do.
Lord Sharkey: There is no additional cost to the consumer?
Graeme Trudgill: Not normally. On commercial insurance, if there were a very large, complex risk, a broker might quote separately for a comprehensive claims service. The brokers I have worked with have never charged additional fees for supporting a claim. Because the client came to you for that support, that professionalism, and you want to retain that client long term. You want them to tell their colleagues and friends that you are the broker who looked after them during their claim. That is very much what we do.
Q64 Lord Davies of Brixton: I hope you are happy to accept the description of an “industry veteran”. You have been involved in the industry for a long time, and you will have seen massive changes. Can you quickly say which have been for the better and which have been for the worse?
Graeme Trudgill: If we look at the consumer duty and how it has helped—from an insurance broker perspective—because we have always been the agent of the client, we have always had the best interests of clients at the heart of what we do, but the rest of the industry did not have that. What the consumer duty has done is introduce best interests to everybody else, such as insurers. That has been a healthy thing to do, and we welcome it as the agent of the client.
It has helped overall with a step-change in putting that client at the heart of all decision-making, including the training you need to do with your teams, so that ultimately the customer has a better overall experience. Even though we were the agent of the client, we have launched six different modules of training with the Chartered Insurance Institute to make sure that our members were able to demonstrate to the FCA how we had best interests there. The consumer duty has been very welcome.
On the product governance rules and fair value, we agree very much with the aims. We want to evidence for everyone that the product is fair value. Some of the processes for doing that have been incredibly onerous. If a broker deals with, say, 50 insurers, and they have 20 different products per insurer across different classes of insurance, the broker has to do 1,000 fair value assessments, and that has been hugely resource-intensive. It has cost some of our members millions. As it is the insurer producing the product, they should be able to say themselves that they feel that product has fair value for the target market.
There is a lot of work to do to improve that regulation. I think the FCA recognises that. It is keen to work with us, and we are working with other trade bodies to try to find easier ways to do it.
An important point concerns gap insurance, which was spoken about in earlier sessions. The FCA intervened there. It completely switched off the product because it felt the product was not offering fair value. What the FCA should have done is looked at the different distribution channels, because the problem originated from motor traders. When selling cars, they were trying to make commissions on selling other things: alloy wheel damage, gap insurance and so on.
The FCA found that commissions were higher on those products and claims rates were not particularly high, because people did not want the product, so it was rolled into the sales process. Here, you have insurance brokers who only sell gap insurance because people approach them. They are not in a showroom selling a car. The broker will offer gap insurance because it is an important product. Taxi drivers rely on it. Mobility vehicle users rely on it. Unfortunately, insurance brokers were switched off at the same time as everybody else, which meant customers could not get cover. Our commissions were fair value, our claims ratios were high, and we were paying out lots of claims, so there was no reason to switch us off.
The lesson learned for the regulator for the future is to consider the different distribution channels and, if there is harm in the market, identify where it is coming from. That brings me back to my opening remarks. We are pleased that BIBA sits on the FCA Consumer Understanding Working Party that was born from the FCA consumer super-complaint.
What we need to decide is: where are these problems originating? Is it connected travel insurance sold with a holiday? Is it packaged bank accounts? Is it direct insurers? Is it brokers? What is the principal cause of the problem? Then we can work together as an industry with the regulator to drill down and focus on a solution.
Lord Davies of Brixton: On a couple of factual points about the nature of the broking industry, do you only represent independents? Do you represent tied agents or people who are list?
Graeme Trudgill: The vast majority will be independent insurance brokers, yes. We focus on general insurance. We do not focus on the life and investment side, although some of our members will do both. It might be that one of those members goes to a particular market, just one market, so there may be an occasion, yes.
In general, our members would use a number of different providers. It may be that on certain lines they launch a scheme—they look at all the products available, partner with one firm that can offer high levels of cover, competitive rates and unique selling points, great delivery.
Lord Davies of Brixton: Competitive rates of commission?
Graeme Trudgill: Competitive rates to the client, so they can compete more widely.
Lord Davies of Brixton: Do different offices offer different rates of commission, and if they want a lot of business, do they make it more attractive to your members to sell that particular—
Graeme Trudgill: Ultimately, our members would have to pass the very serious fair value test. Any commission they take, they would have to be mindful of fair value. It is a commercial discussion. Some brokers will offer the full service—they will do all the placement, they will effectively have an old-fashioned cover note book, they will place the business, they will do all the administration that the insurer would otherwise do.
That is called work transfer, and the broker might earn a higher commission if they are doing a lot of the insurance company’s work, because they have a large expert team to service a particular area of the market. They may have a scheme for dental surgeries. Other brokers may be more transactional and rely on insurers to do more of the administration work. It depends on what the broker is doing, and the commission will vary. The overarching point is the regulator’s point on fair value: whatever they do, they will have to demonstrate that.
Lord Davies of Brixton: When I buy insurance from a recognisable name, in small print at the bottom of the documents it says the policy is reinsured by somebody you have never heard of, usually based in Bermuda. Do you see that as a particular problem?
Graeme Trudgill: The PRA has very strict rules on the firms operating here. The FSCS—the Financial Services Compensation Scheme—is here as a backstop, so if a firm were to fail, there is compensation available for consumers. Brokers have security committees. BIBA itself supplies members with access to security firms so they can understand the ratings. Are they a Standard & Poor’s A, for example?
If the insurer does not have a Standard & Poor’s rating or an AM Best rating, and others are available, we have our own test, which was developed with a specialist company called Litmus Analysis. It will look at insurers without a security rating to assess their reinsurance programme, their reserves, and so on, so we can understand whether it is safe to use that insurer that you have never heard of before.
Overall, if you look at failures of insurance companies selling to UK consumers, they are very few and far between. I think we are one of the safest harbours in the world, which is why we are a world-leading insurance market.
Q65 Lord Turnbull: Are insurance brokers an endangered species?
Graeme Trudgill: No. We are in a very healthy place. The premiums we are writing are more than ever before. On commercial insurance, probably around 90% go through insurance brokers. Others go through direct insurers and banks, for example. I think it has never been as important as it is now to use an insurance broker. We are in a very complicated and dangerous world. There are many risks. What insurance brokers bring is advice, support and professionalism to help transfer those risks, to help clients grow and take risks.
Many of the brands you see on comparison sites are from insurance brokers, too. Everyday names are actually insurance brokers because they may have the FCA intermediary permissions. From our perspective, yes, younger generations like to go on their phone, click, and buy and get something quickly and cheaply. However, there is a good opportunity that that could be an insurance broker.
As I say, we believe around a third of people use brokers. This is why it is important to shine a spotlight on it now. We are very happy to be able to talk about this with you today, because the FCA’s work on where better outcomes arise and where worse outcomes arise is critical for us to understand why people probably need to spend more time thinking about the suitability of what they are buying. That is where the broker can help them and offer them advice and guidance throughout that process.
Lord Turnbull: This figure you have quoted of a third, is that for the insurances that households typically buy?
Graeme Trudgill: Yes.
Lord Turnbull: Is that market as sound and sustainable as the business market? I can see that most people with a business would naturally think to go to a broker. Households have choices, and the snake oil salesmen of the comparison websites seem to make it easy and tempting for them. Are you finding that the household part is as robust and sustainable as the professional and business part of the sector?
Graeme Trudgill: You are right that there has been a commoditisation of things such as home insurance, very much led by comparison sites. Home insurance is one where banks have always been a big player because of the mortgage requirement to have buildings insurance. It is sustainable. Some of the very smallest regional brokers offer support to the local community; local and vulnerable people perhaps might prefer to go in and get that support from a local broker. Yes, some have stopped selling home insurance, but most brokers would be keen to help, and if they cannot, they would signpost.
This is something that was mentioned in the previous session. There are a number of signposting agreements that BIBA has created with the Government and the regulator over recent years. If a query does come from us, a non-standard risk, for example, we have a flood insurance directory, and we have a signposting service there. People who have been flooded before, or live in a flood-risk area, may find it difficult to go on a comparison site to get insurance that covers flood for their home. This is where insurance brokers come in.
We have specialist brokers and schemes that can help. We vet those insurance brokers who want to apply to be on that specialist directory, and we work with Defra, Flood Re and the ABI to identify which brokers can help. There are many specialist brokers on home insurance and flood insurance.
Brokers offer specialisms that you are not going to get just on a comparison site. If you have a listed property or a thatched property, you are going to benefit most by using an insurance broker who has access to professionals and schemes that could assist you.
Lord Turnbull: If you are buying and selling a house, everyone will know the names of at least six estate agents. What are the chances that they know the names of any insurance brokers?
Graeme Trudgill: There are common names. The AA, for example, is a fantastic BIBA member broker. We have a Find Insurance service, first of all. We are a not-for-profit organisation, and we take over 400,000 inquiries a year from the general public. We triage those inquiries and then match them to the specialist brokers we know can help with that particular inquiry. Maybe they do not know the name of that broker, but they do not have to phone us, they can go on our website to find out—
Lord Turnbull: You are using the word “we”. It is a difficult word in the British language. What is “we”?
Graeme Trudgill: BIBA brokers. Collectively, the BIBA website and the BIBA Find Insurance helpline very much help there. We have just launched a campaign called “Ben the Broker”, which is encouraging people to go to their local broker, or they can contact us to find a specialist broker. There is more that could be done.
As part of our FCA annual bill to the Money and Pensions Service, we all pay a regulatory contribution, and they are there to help educate consumers on where to get suitable insurance. I do not remember them being mentioned in any of the preceding committee stages here. The Money and Pensions Service is a valuable part of this. BIBA has sat on the Government’s financial inclusion committees to assist there as well.
We have a number of long-standing signposting agreements. We have one for older people seeking motor and travel insurance that we started in 2012. When you get to perhaps 85 years old, you will find that a lot of comparison sites will not accept you, and your packaged bank account probably will not accept you for travel. This is where insurance brokers come in. We launched that signposting service with Theresa May, the Treasury, the Government Equalities Office, the ABI, and Age UK. That service, along with some of our others, has helped 1.7 million people since its launch.
We have a protection agreement for people seeking life insurance who may have had a serious medical condition or disability. We are an accredited FCA travel medical directory. We screen travel insurance brokers who say they can help with specialist medical conditions. People can go on our website or ring us and get help; even if they have had the most serious medical condition, we can usually get them some travel cover so they can have perhaps that last holiday with family.
We have lots of case studies, and the signposting agreements we have do a great deal of good. I would like GOV.UK to promote them more. I would like the Money and Pensions Service to promote them more. We are only a small trade association, and we can only do so much. What we did this January was partner with the ABI—which gave evidence previously—to launch what we call Total Retail Signposting. What that says is, “If a consumer cannot access the insurance they want, for whatever reason, we will signpost them to either a firm we know can help or to BIBA as that catch-all, neutral signposting service”. We are very happy to help people and try to place them with a suitable broker. There is a significant and important future for insurance brokers in home insurance.
Lord Turnbull: I think a lot of people do not know or realise that you exist and provide a useful service: for example, that you can get help from brokers in deciding which policy to buy in the first place, and then if you make a claim, the brokers will help you navigate that, saying the offer made is not good enough and you can do better. Do you think you have a job to do to make the contribution of brokers more obvious, so that people are not tempted to go down the DIY route, which they may later regret?
Graeme Trudgill: I know exactly what you mean. We are very cognisant of that, which is why we are just starting this “Ben the Broker” campaign. There is more to do. Often when you hear financial commentators in the press or on television, they talk only about price and going on a comparison site. I certainly think they should focus more on the suitability of the product. That is certainly a message we would like them to deliver. Yes, we do have a responsibility, and we want to do more.
With people now searching on AI to buy their insurance, there is an opportunity for us to make sure that we are connecting with that as BIBA, so that people can find a local broker or a specialist broker from our site or our call centre. Most towns and cities have brokers serving the local community that you can walk into.
We receive a lot of letters from constituency MPs saying they have an issue with flood, or some young drivers who cannot find cover asking, “Can you help us?” We always come up with solutions to help them. We are keen to do more to promote the sector, and I hope this helps.
Lord Turnbull: I have not the faintest idea who my nearest broker is.
Q66 Baroness Bowles of Berkhamsted: I have been satisfied by my insurance brokers, whom I have had for a long time, and they have done well for me when it has come to claims. The one question I would have is: how much switching do you think insurance brokers tend to do? My personal experience is that I have had information from them about why insurance is going up, in general terms, and I think that on motor insurance they have recommended switching, but not on property insurance.
If you get into a scheme, you do then tend to end up stuck until maybe the relationship breaks down, the brokers saying to the insurance company, “You are not any good anymore” or whatever. How does that work?
Graeme Trudgill: I was speaking to brokers recently about this exact subject. When I was a broker myself, I would say when it is coming up to the renewal, you get the renewal invitation from the insurer, you look at it and then you run it through the system and you see how does it compare, can you get your client a more competitive rate with the same cover, does your client still have the same demands and needs that they had at this time last year? A broker who was not actively rebroking, and was not looking to do that, stands to lose that client, who may go elsewhere. Yes, we do very much consider every renewal, because these are just annual contracts.
Baroness Bowles of Berkhamsted: Is that an obligation on you in terms of values?
Graeme Trudgill: It is all part of the consumer duty best interest, that you want to do your best to keep your clients. A broker might have a new scheme, and they would say to the client, “Here are your existing terms, your existing prices, or sums insured, but here is an alternative. We have just got this new market here and maybe you had a claim with this particular one, or maybe you added a young driver to your car, and it is no longer as competitive, so, because your circumstances have changed, this one over here seems to be offering a more attractive option for you”.
However it might well be the case that everything is the same, it is still the best deal; it is in, say, a special thatched-roof scheme and compared to others it is still the best one the broker can find for you. It is about having that discussion at renewal. When you receive the renewal from the broker, it will flag if there is a good alternative for you to switch to.
Q67 Lord Eatwell: As brokers, you have a very clear view of the insurance industry because you have to survey the whole thing if you are a specialist and so on, so you must know who the bad actors are. For example, we have had a number of cases put to us of examples where an apparent failure on the part of the insured had no connection at all with a declined claim: in other words, a failure by the insured to declare something that had nothing to do with what the claim was about but led to the voiding of the policy. Now you must know the insurance companies that play those games. Does the broking industry keep data or information on such bad actors?
Graeme Trudgill: The insurance broking industry knows which insurers are best at handling claims, and who the reliable ones are, absolutely. The FCA, remember, produces its value measures report every year. That report looks at the average claims payout, the percentage of premiums paid out in claims, complaints about claims paid as a percentage of claims. You can look up insurers and how they performed on some of those metrics. There is some information available to the public, but we also have the financial ombudsman service as a backstop. If there is someone not acting as they should, the broker may not use an insurer who they did not believe was going to provide the ultimate—
Lord Eatwell: I am sure, yes, but do keep any data on this? Could you give us a little report on the proportion of bad actors?
Graeme Trudgill: The FCA value measure is probably the key public data that is available, along with the ombudsman. BIBA does not hold anything on that centrally. Our priority is to get the claim paid because, if it is not paid, first, the broker is going to lose that customer. The broker has failed them. Secondly, the customer will quite possibly sue the broker, because every broker will have professional indemnity insurance, and that is there for their errors and omissions.
If a claim is not paid—to use your words, due to a “bad actor”—the broker is going to be on the hook for that. They do not want that either. We use markets that we trust and that we work well with. We would whistleblow to the regulator if we felt we had identified issues with an insurer that were not appropriate. The regulator usually takes some time to investigate that and never comes back to us officially. You might just read in the press that this might have happened with this insurer and perhaps they have been stopped from selling a particular line of business.
Lord Eatwell: We have been given these broad numbers about the number of claims that are refused, very few in motor and about 30% in household. Is that the experience of the broking sector of the industry as well? If I asked your members what proportion of household claims are declined, would they come up with roughly 30%, which seems to be the industry average?
Graeme Trudgill: We believe the vast majority of claims through brokers are paid, and this is why we really want to see the work that the FCA is currently undertaking on the sales process and the ultimate outcome on claims paid. Once we know that we will finally—once and for all—be able to say, “If you go to a broker, you will get this percentage paid”. I think the ombudsman and the FCA probably already have a good idea. When you look at the interventions it made in the market recently, it has not been with insurance brokers, so we are confident that brokers will give a great outcome for clients.
BIBA ran statistics a long time ago, and we stand by them. If you look at the FCA value measures individually, and at the insurers that only use brokers and the insurers that are only direct, you can see the number differentials and usually the insurers that only use brokers have very good outcomes. I think the key thing is for us all to push for the FCA to come out with those results as soon as possible. Then we will know why those claims are not paid through certain distribution channels and then we can deal with that.
Q68 The Chair: Do you know when that data is likely to be available?
Graeme Trudgill: We chase the FCA regularly. I hope it is going to be with us within about two months.
The Chair: We are not seeing the FCA until September.
Q69 Lord Hollick: I want to come back to the comparative prices for similar insurance. Your members are offering a full service. I believe that the comparison sites do not offer anything like the same service, in terms of disclosure and explanation at the start and following up on any claims. If I take standard household insurance, what would be the additional amount that I am paying to have the full service of one of your brokers, say, with a comparison site?
Graeme Trudgill: What you are talking about is the cost of acquisition of a client.
Lord Hollick: Yes.
Graeme Trudgill: The comparison sites spend tens of millions of pounds every year on national TV. You probably all see the advertisements. That is their cost of acquisition, and it is significantly more than that through a broker. Insurance companies might choose to pay a broker. Your brokers will be all around the country; there is a national network of branches for them. They will choose to pay the broker a commission and that is the cost of acquisition through that distribution channel.
Alternatively, the insurance company might say they are going to have a national TV advertising campaign, or be on YouTube or in national newspapers, and they will spend a lot of money on that instead of broker commission. Therefore, we do not believe there is any additional cost in going to an insurance broker. We think we are a bargain because of the work that we do for the insurers and for the clients.
I hope that that answers your question. It is all about the cost of acquisition and with brokers, as you say, maybe the brands are not so well known because they are not spending £50 million, £60 million on a TV campaign, so that is a massive cost of acquisition for the comparison sites and insurers.
Lord Hollick: Moving to the claims side of things, clearly a lot of insurance companies outsource that and there is quite a competitive market to provide claims-handling services. In response to a question from Lord Eatwell, you said you have been able to identify those who are better at handling claims and those who do it less well. If we look further into that, what are the arrangements that you believe exist between the insurance companies and the claims-handling companies? How were they rewarded and what incentives do they have? I presume with various insurance companies, you can tell those that are perhaps a little bit more helpful in paying a claim quickly and those who are less so. What are the incentives that are at work in that marketplace?
Graeme Trudgill: Because of the consumer duty and best interest, there would not be any incentives that were not all correct. Some insurers invest heavily in technology and experienced staff. They have claims teams, perhaps they do not even outsource a lot of things, perhaps they have full control of that claim themselves, and maybe they have their own approved repairers to repair vehicles and things like that. It is up to an insurer to decide how much they want to invest and how much they want to outsource.
Ultimately, we know what works best from the experiences with insurers that we have when we are managing clients’ claims. That will be part of the decision process as to which agencies we use when we are placing business, and who we want to use if we want to start a scheme for something in particular. I do not think there are any incentives that are not above board, but certainly claims are approached in a different fashion by different providers.
Maybe we can just touch on a point that I have heard raised in other sessions about a cash payment or a full-claims service. I think that is perhaps a good example. If you have a total loss on your car, really all you need is the money to go and buy another very similar car, so I think paying out for cash is absolutely fine for that.
However, if you have—as we mentioned earlier—a flood claim on a home insurance, you are going to need all sorts of experts in drying out, disinfecting, redecorating and also, I would hope, rebuilding in a resilient fashion, so if the flood comes back again you are less likely to have such extensive damage. Where we need the full claim service is very much on perils like that, but less so in areas such as a total-loss car insurance, so there are some differentials as well.
Lord Hollick: Do you think that there are any measures that the Treasury should be taking to help improve customer outcomes?
Graeme Trudgill: Yes, I do think Treasury could be pushing the FCA for a number of things. As we said, we are really keen to know the cause of the claims rejections through the sales process and the different distribution channels.
We have not talked much about clients’ documentation, and they can receive quite a lot of paperwork when they buy an insurance policy. There are things—for example, ICOB 4.1.2 R—where the broker would be required to tell the customer if an insurer had more than a 10% stake in that brokerage. Now, I can completely understand why the FCA would want to know that, and the broker would have to manage their conflict of interests and evidence how they are doing that for the FCA, but the client wants to know: what is the price? What am I covered for? What am I not covered for? What are my optional extensions? Clients do not need to know about the ownership structure of the insurance broker.
I think a review could take place to see how to make customer documentation simpler. I think the Treasury and the FCA could work with the industry to move much more towards plain English wordings, plain numbers, and lower reading ages, so that we can deliver something that is more digestible for the customer.
I think that the IPID—the insurance product information document that came out of Europe—is reflective of the policy that you buy, the standard wording. It is not reflective of a client’s individual circumstances and any voluntary excess they took, and things like that. I wonder whether it is time now for the Treasury to ask the FCA to review the IPID. Do we need it? Is it suitable? Can it be improved in any way? We have to go through the motions, but are our clients really reading it and are they benefiting from it, because the insurer or the broker will provide a schedule anyway, with the specificities for that client?
Together with the help of Treasury, we could do more to promote what the common reasons for a claim being denied are, for a declinature. Rather than an IPID it is probably more helpful for a client when they are buying their insurance policy—say it is a travel insurance policy—to know, “These are the main causes for your claim not being paid: you did not disclose a pre-existing medical condition. You did not read your alcohol exclusion, and you breached it. You went paragliding, which is an excluded hazardous activity”. If they are the most common rejections, why do we not flag them at the point of sale so that people realise, “I am not going to trip up over that and do that wrong”. That is something that perhaps the Treasury, the Money and Pensions Service, the FCA and industry could work on together.
I mentioned the connected travel insurance side of things, where travel agents do not have the same regulation as brokers and insurers. I think that clients should get that same protection wherever they go. There should be a level playing field for consumers. That should be looked at. That is Article 72B of the Financial Services Markets Order 2001.
MaPS just generally could do more. I think that MaPS tends to have things on its website that are quite helpful if you get on to the website, but my mum probably never goes on the MaPS website. Young people probably never go on the MaPS website. Therefore, could MaPS do a campaign that would perhaps help with some of the issues I just mentioned?
Q70 Lord Sharkey: You mentioned on the way through the embedded travel insurance that features in some banking packages. You say in your written evidence that where there is no meaningful assessment of suitability and where insurance is not the primary reason for the purchase, cover may not attach. That sounds potentially like a pretty serious problem, but how big is this? Is this worth paying attention to? You do make a recommendation that this committee, along with the FCA, examines the problem that this might present.
Graeme Trudgill: Yes. The FCA did intervene recently in this area with a particular organisation, and it paused their sale, so clearly it has identified that it is an issue. I do not know what proportion of people realise that—I looked at one of the leading banks recently—there is a cut-off at age 70. To what degree are clients made aware of this when they are arranging their bank accounts? They are probably told to look at the small print, but I think there are certain things that really need to be flagged very clearly when you are arranging that account. It is something that the regulator needs to be conscious of, and needs to be looking at in a bit more depth.
It all comes back to: where is this detriment arising from that the consumer body Which? has talked about, and then how we can work together to make it better?
Lord Sharkey: Do we know whether claims under these kinds of subordinate policies are actually paid out more frequently than those that are—
Graeme Trudgill: I think the ombudsman would possibly have those statistics as well, so I think the ombudsman is part of the answer in providing that data. None of us has that data, but we really think it is important to see it. Which? has made some very sweeping statements about the industry. The industry is based on trust, so we need to make sure our clients trust us. Insurance is an intangible product, so it is very important that we preserve that reputation.
What we think is important is identifying areas where things can be improved. For example, we talk about customer understanding not being as good as it could be in some areas. Look at what the airline industry has done. When you go on a plane, you used to get the people doing the safety check, and few people paid attention but, nowadays, some of the airlines have these small video clips that make it far more entertaining, far more engaging.
Between the industry, the Money and Pensions Service and others, and banks, there is more we could do to flag in a more engaging way, through things like short videos: this is what you are covered for, but you would not be covered for this, do not do this. There is an opportunity for us to deal with these things going forwards.
Lord Sharkey: One of the consequences of reading your evidence was that I checked my own, and you are right.
Graeme Trudgill: I have a good broker who can assist you.
Lord Sharkey: Thank you.
The Chair: Mr Trudgill, thank you very much for your time this morning in this rather sweltering room. Thank you for sticking it out with us and for answering all of our questions with candour and with considerable detail. Thank you very much.
