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David Sparkes -British Insurance Brokers’ Association- Written evidence-(CIR0015)
The British Insurance Brokers’ Association (BIBA) is the UK’s leading general insurance intermediary organisation, representing the interests of insurance brokers, intermediaries and their customers.
BIBA membership includes around 1800 regulated firms, employing more than 100,000 people. General insurance brokers contribute 1% of GDP to the UK economy; they arrange 72% of all general insurance with a premium totalling £74bn and 92% of all commercial insurance business. Insurance brokers put their customers’ interests first, providing advice, access to suitable insurance protection and risk management.
BIBA receives hundreds of thousands of enquiries per year to its Find Insurance Services, online and via the telephone, which are directed to insurance broking firms.
BIBA is the voice of the sector advising members, Government, regulators, consumer bodies and other stakeholders on key insurance issues.
The following provides responses to the questions raised, following consultation with our members, many of whom are involved in the placement of commercial insurance and/or reinsurance.
Summary
The role of the insurance broker
Before responding to the specific questions raised as part of this consultation, it is important to understand the different roles that participants in the insurance sector fulfil.
In very simplistic terms; an insurer is a capital-based business (not unlike banks). It carries the risks it has agreed to underwrite on its balance sheet and will pay out when valid claims are received. It also seeks to mitigate it’s financial risk (which can be significant) through use of reinsurance or by sharing the risk with other insurers.
An insurance broker intermediates in the insurance procurement process, bringing the buyer (the insured) and seller (the insurer) together. On most occasions the insurance broker will act as the buyer’s agent, purchasing the insurance on the buyer’s behalf and providing professional advice to the buyer on the most appropriate cover, at a price that provides value for money, In certain circumstances, an insurance broker may act as agent of the insurer.
Significantly, a broker will also, typically, provide advice to customers on claims handling.
As part of the service of helping customers manage their risks, an insurance broker may source several insurance policies for a customer, in return for a single fee. This is not uncommon for customers that come to the London Market. As such, brokers need a regulatory environment that creates a framework for, not barriers to, providing an important service to customers.
Some insurance brokers also intermediate in the arranging of reinsurance business.
Other participants in this market include Managing General Agents (MGAs) which provide underwriting expertise, but like brokers, do not carry risks on their balance sheet. MGAs act as agent of the insurer in accepting risks.
Is the UK regulatory framework appropriate for the commercial insurance and reinsurance sectors?
The volume and direction of travel in regulation of the insurance industry suggests a regulatory environment that does not distinguish between the needs and knowledge of individual customers and those of large corporates (that typically come to the London Market).
By way of example, the proposed application of the new Consumer Duty, on which the Financial Conduct Authority (FCA) is consulting at the time of writing, looks to align the requirements with those customers covered by sector-specific conduct of business rulebooks. For the insurance sector, this is the Insurance Conduct of Business (ICOBS) rulebook, where the focus is on ‘policyholders’ and ‘prospective policyholders’. The duty would thus apply in the same way and to the same extent whether the customer was an individual policyholder or a large, multi-national corporation as a policyholder. The original policy intent was to improve outcomes for ‘ordinary’ consumers and small businesses, suggesting the current proposal may have lost its focus.
As large corporates are sophisticated buyers of insurance, with their own risk management expertise, their needs and service requirements are vastly different from say a young person buying insurance for their first car. That being the case, catch-all regulations are not an appropriate approach. In fact, it could be argued that they risk undermining the FCA’s statutory objective of ensuring markets work well, when dealing with sophisticated clients comes with a requirement to treat them as if they have no knowledge or experience of insuring their risks (which any experienced risk manager is likely to find insulting).
It is the view of a number of members that the FCA seems to believe that the market can absorb whatever the FCA throws at it, without consequence. The regulator does not seem to recognise the commercial reality that compliance costs are proportionately greater for smaller firms. Thus, with every new “initiative” they introduce, the FCA gives further justification for the departure of smaller firms from the market. The rapidity with which regulatory changes are introduced (with one coming on the heels of the previous one and little to no time to bed the last change in) is also an influential factor. A number of former BIBA members who have sold their businesses, have cited the weight of regulation as a strongly influential factor in their decision to exit.
Data obtained from the FCA and laid out graphically in BIBA’s 2022 Manifesto indicates that the number of regulated insurance brokers has decreased from 5,616 in 2013/14 when the FCA was formed, to 4,352 in 2020/21 (a loss of 1,264 firms). For an organisation that is meant to promote competition in the interests of consumers, this is not an encouraging finding and seems to run contrary to their objective.
The data presents an even starker picture when factoring the fall in the number of insurance broking firms since the sector became regulated in 2005, under the previous incarnation of the FCA, the Financial Services Authority (the FCA is the same legal entity as the FSA). FCA data tells us that the number of regulated insurance brokers in 2006/07 was 8,261, meaning that the market has shrunk by approximately 47% over the period from 2006/7 to 2020/21 and thus there is less competition in the interests of customers.
(Please see: https://view.publitas.com/biba/biba-2022-manifesto/page/40)
To what extent do the Bank of England and Financial Conduct Authority apply and interpret regulatory policy in these areas in a proportionate manner and strike the right balance between regulation and competitiveness?
As BIBA’s members are regulated by the FCA only, the following comments apply to that regulator only.
It is our observation that whilst the FCA speaks of proportionality, the degree of concern raised by our members (particularly small brokers) in respect of regulatory action or demands, suggests otherwise.
An example of this relates to the number of surveys that insurance brokers dealing with commercial and/or reinsurance business have received last year within a matter of weeks. These have covered preparedness for the general insurance (GI) pricing practices remedies, a credit broking survey, a data request related to buildings insurance for high rise properties (where the customer is often a commercial entity), a periodically repeated survey on firms’ financial resilience and where the insurance broker has acquired other insurance brokers, a ‘fast growing firms’ survey. These surveys appear to emanate from different departments within the FCA, without anyone at the regulator taking a ‘helicopter view’ of the cumulative impact of so many information demands on the same firms and those firms’ ability to serve their clients.
Additionally, the financial resilience survey is sent to firms irrespective of whether they have, are, or soon will provide similar data as part of their scheduled data submissions to the FCA, known as the Retail Mediation Activity Return, or RMAR. The RMAR includes Section A on the firm’s balance sheet, Section B on profit & loss and Section D on regulatory capital, so firms may be asked to submit similar data in different forms, if the RMAR coincides with the resilience survey. As one might imagine, for the firms in this situation, it does not appear that proportionality is being considered.
A further example of the catch-all regulatory approach (in addition to the application of the new Consumer Duty mentioned in response to the first question) relates to the GI Pricing Practices remedies. These remedies were announced following a ‘market study’ (investigation) into how motor and home insurance products were priced and the impact this had on consumers. Insurers’ pricing strategies for these products saw renewing customers used as ‘cash cows’ to fund below cost prices for new customers. The remedies for this practice included a requirement to carry out assessments of products to ensure they provided fair value to customers over their ‘lifetime’ (the length of time a customer held the same policy). Despite the fact that the market study’s evidence related to home and motor products only, the FCA has applied the requirement to all consumer and commercial products (excluding contracts of large risks), without data to justify the wider application.
Linked to the above, the pricing remedies require ‘product manufacturers’ (eg insurers) to collect data on the price of any products sold alongside their own and what fees if any, all firms in the distribution chain (if there is more than one) may add to the price clients are asked to pay, to enable them insurer to assess whether their product offers ‘fair value’ when sold on its own and when sold as part of a package of products. Where business is brought into the London Market by an overseas broker, the fair value assessment obligation attempts to take on an extraterritorial scope. This creates additional costs for the London Market broker (as the party in contact with the insurer) as they try and obtain the data from an overseas firm (or firms) over which the FCA has no jurisdiction and creates uncertainty over what the regulator might consider as reasonable efforts to obtain the data.
The Senior Managers and Certification Regime (SM&CR) is a further example of the lack of proportionality in the FCA’s application of rules. An inquiry by the Parliamentary Commission on Banking Standards (PCBS) into professional standards and culture within the UK banking sector, following the 2008 financial crises and LIBOR-rigging scandal, resulted in a number of recommendations, one of which was a new accountability framework focused on senior management within banking. This framework came to be known as the SM&CR. Despite the PCBS’s focus being purely on banking, the FCA decided to roll out the SM&CR to all firms, including those operating in the commercial insurance and reinsurance sectors. There was no evidence to suggest that the then existing regime (known as the Approved Persons Regime) was in anyway inadequate for firms outside the banking sector, suggesting once more that proportionality was not considered by the regulator.
As part of the Financial Services Future Regulatory Framework Review, HM Treasury is proposing to introduce an international competitiveness and growth objective for the FCA and Prudential Regulation Authority (PRA). As the Treasury plans to make this a ‘secondary’ objective which will sit below the FCA’s operational objectives (and so in effect, it will be a ‘tertiary’ rather than ‘secondary’ objective), there is a concern that when challenged, it will be argued as having been ‘trumped’ each time by the regulator furthering the statutory or an operational objective.
Section 138I (2) of the Financial Services and Markets Act 2000 as amended (FSMA), requires the FCA to publish a cost-benefit analysis (CBA) alongside a draft of any rules it proposes making. The accuracy of these CBAs has long been questioned by market participants and their representative bodies. The common view is that these CBAs underestimate the cost impact on firms. Such is the degree of concern that has been raised around CBAs, that HM Treasury is consulting on creating a statutory CBA panel (to sit alongside the practitioner panels that were created under FSMA) as part of the Regulatory Framework Review mentioned above. The CBA Panel’s role will be to review and challenge the FCA’s CBAs. The review asks a question on whether the challenges to the FCA’s CBAs should take place pre-publication or post-publication of FCA consultations. It is suggested that these are carried out pre-publication, so that the regulator only comes to the market with more thoroughly costed proposals.
How do the activities of the UK’s financial regulators affect the ease of carrying out commercial insurance and reinsurance business in the UK? What impact does this have on the availability and cost of insurance cover in the UK?
When the FCA started its market study on the Wholesale Insurance Broking sector in 2017, it said it did so through a competition ‘lens’, citing only anecdotal evidence of insurance brokers’ practices such as ‘pay to play’ (requiring insurers to buy other services, or risk not being selected for insurance placements); their use of ‘facilities’ (arrangements which make use of pre-agreed insurer capacity, rather than competing on the open market); as well as the largest brokers being able to use their size to demand higher commission levels than insurers would like to give. As part of the review, the FCA collected many millions of lines of data on actual placement activity.
Whilst FCA market studies generally include publication of an interim report to allow for comments to be submitted to the regulator, the FCA took the unusual step at the conclusion of its study in 2019, of going straight to a final report, as its very detailed research found a lack of evidence of the actions for which brokers stood accused. In publishing its report, the FCA’s then Executive Director of Strategy and Competition, Christopher Woolard, said:
“This was a significant and in-depth analysis of a sizeable and complex market to determine whether clients were at risk of harm. Encouragingly, we found no evidence that they were but we found some areas with scope for improvement and we will work with the industry to ensure these are addressed.”
There is scope for improvement in any market, but the detrimental impact felt by the market started at the publication of the Terms of Reference for the study. Commentators from around the world and those overseas firms looking for the support of the London Market to place business, mistook the areas that were to be investigated as findings and no doubt this was of persuasive influence in deciding whether to come to the UK with their business.
What is the status of the London Market’s global competitiveness, and how is this impacted by different regulatory approaches in other territories?
Whilst focused on the UK Listings regime, a review by Lord Hill of Oareford CBE noted that:
‘Other financial regulators – for example in Australia, Singapore, Hong Kong and Japan – have competitiveness or growth as a regulatory objective. Coming closer to home, the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority are each required to take due account of the impact of their activities “on the Union’s global competitiveness”. The FCA has no similar objective.’
UK Listing Review 3 March 2021
(Please see page 8 of Lord Hill’s report at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/966133/UK_Listing_Review_3_March.pdf)
As mentioned above, HM Treasury in its consultation paper on the Future Regulatory Framework, is proposing to give the FCA a ‘secondary’ objective around international competitiveness and growth. Whilst the introduction of the objective is to be lauded, its status as a secondary objective runs the real risk that it receives little regard by the FCA in comparison with the operational objectives or statutory objectives, which have a higher priority. It is our submission that the international competitiveness objective should be made into an operational objective, if it is to have any positive impact on the competitiveness of the London Market, when compared to other major insurance centres.
What improvements could be made to the regulation of commercial insurance and reinsurance in a post-Brexit context?
The UK’s withdrawal from the EU provides an opportunity to rationalise the regulatory regimes to one that falls under the so called ‘FSMA model’ (aligned to the Financial Services & Markets Act 2000) which will clarify the roles of Parliament, HM Treasury and the regulators.
The opportunity also permits the regime that operates within the insurance market to adopt approaches used in other markets that would work within the insurance sector. In mind, we have the approach used within the investment sector that splits its customer categorisations into ‘retail clients’, ‘professional clients’ and ‘eligible counterparties’, with the latter two afforded a lower degree of regulatory demands given their respective knowledge and experience of the products they are buying. Whilst not looking for the same categorisations within insurance, a difference in regulatory expectations of firms serving customers that are or are not sophisticated, could be adopted.
Often, international customers are introduced to the London Market by a broker from within that customer’s home state and for whom they act as agent (in London Market terms, the overseas broker would be known as ‘the producing broker’ and the London Market broker would be called the ‘placing broker’). This factor could also work with a categorisation akin to ‘eligible counterparty’, when determining the responsibility of the London Market broker towards the international customer.
As the FCA speaks of the good outcomes it is looking to achieve by its rulemaking, it may encourage EU firms that are looking towards the London Market as a placement option for their clients, to bring that business here, if those outcomes remain aligned with the outcomes being sought across the EU (akin to ‘equivalence’) whilst taking the opportunity to remove EU-derived rules that do work in a UK context. EU firms would have the comfort of being able to follow the same/similar processes as they do for business that they place in their local market without worrying about an extra layer of compliance costs.
It also has to be said that good outcomes do not need a constant barrage of new rules, to be achieved.
11 February 2022