At the biennial meeting of the Federation of European Risk Managers Associations along the placid lakeshores of Geneva, Switzerland, in October, European brokers declared, in no uncertain terms, that they deserved more money for providing a service to insurance carriers.
Whether the extra dough dribbled out of buyers' pockets in the form of higher premiums, or whether the revenue came straight out the carriers' bottom lines, brokers didn't really care. All they really wanted was their cut--even in a soft market--and they made it clear that they were going to ask for it point blank.
"If there's more money to be gotten, if you don't ask you won't get it," said Sarah Turvill, chairwoman of Willis International, during a discussion on brokerage commissions in front of dozens of European risk managers in the audience.
It was blunt talk from the head of one of the world's biggest brokerage firms, and many buyers were less than pleased. Buyers already pay brokers north of 15 percent to place their insurance programs with a market, but now brokers were asking for even more.
So it was a wonder buyers didn't storm the dais to ram a copy of the European Commission's latest report on competitive insurance industry practices down the throats of brokerage executives. Never mind the extra commission payments for brokers. The commission report, more than 100 pages long and more than two years in the making, found the risk management industry already weighed down and hobbled by anti-competitive practices.
Those inefficiencies are often passed on to buyers who represent companies operating in the 25 European Union member states. Those companies each pay their share of the roughly $536 billion (375 billion Euros) in nonlife premiums collected annually by insurance carriers.
As for buyers who've ever wondered aloud whether they weren't quite getting the best price, or buyers who've felt they weren't necessarily getting the best terms, or buyers who've even whispered the word "collusion" in private conversations with their peers--well, it just might be that they're onto something.
But, according to competition commission officials, it's the buyers of small to midsize European companies who fare the worst under the existing industry structure, as their options in the marketplace are relatively limited.
"At present, the competitive market dynamics in relation to the price of mediation services appear limited, at best, as far as SME clients are concerned," the commission wrote, in its final Sector Inquiry report on commercial insurance released in September.
The "seemingly low concern" of insurance mediation services to small and midsize companies, the report also says, could potentially lead to "serious concerns of market distortion."
Three areas of the European insurance sector require further study, according to Neelie Kroes, the EU's competition commissioner: Certain aspects of coinsurance and reinsurance, instances where long-term contracts lead to foreclosure and "indications of potential market failure" with respect to insurance brokerage.
That the insurance brokerage community in Europe serves two masters simultaneously, the buyer and the carrier, is already well known. Concerns over the dual allegiances were once more underlined by the Brussels commission and Neelie Kroes, the European competition commissioner.
"Brokers act both as an advisor to their clients and as a distribution channel for the insurer, often with underwriting powers and binding authorities," the report states. "This dual role is a potential source of conflict of interest between the objectivity of the advice they provide to their clients and their own commercial consideration."
FERMA officials, who two years ago tried without success to get European brokers to reform their approach to charging commissions, in October were the midst of drafting an official response to the European Commission's report.
They conceded, however, that commissions were still a sore spot for many European risk managers, even with the push for greater disclosure on the part of EU industry regulators.
"It's still a problem at the company level for us, and for FERMA it's still a problem," said Franck Baron, vice president of FERMA and director of risk management for Firmenich, the Geneva-based fragrance and flavors giant.
How likely brokers are to follow the commission's recommendations, which include improving the level and quality of disclosure on what they get from the buyer and the carrier, is another matter. Brokers don't "spontaneously" reveal their commission agreements with clients. In addition, national broker trade groups fiercely guard their turf and protect their lucrative market share in each of their various markets.
The ink was barely dry on the commissions report, for example, when Eric Galbraith, CEO of the London-based British Insurance Brokers Association, quoted in an October news report, dismissed the commission's work into insurance industry sector competition as a "pointless inquiry."
Galbraith's response should come as no surprise, given brokers' commanding role in the distribution of commercial insurance products within the United Kingdom.
In the U.K., brokers had a market share of no less than 55 percent in the distribution of each of the following risks in 2005: property, marine, aviation, transportation, auto, general liability, professional liability, environmental liability, D&O and credit.
But that's not the case in Italy, for example, where captive agents are by far the most important distribution channel for commercial insurance.
On average, though, across the 25 members of European Union, brokers were the dominant distribution channel in 2005. Brokers had a market share of between 40 percent and 45 percent for property, marine, aviation, transportation, auto, general liability, professional liability, environmental liability, D&O and credit risk.
Their next closet competitor, agents selling on behalf of a respective carrier, had just over 25 percent market share.
But in stark contrast to Galbraith, Alex Moczarski, chief executive for Europe, Middle East and Africa for Marsh, the U.S.-based broker, which two years ago abandoned the practice of accepting commissions from carriers based on volume following an $850 million settlement with former New York Attorney General Eliot Spitzer, said he welcomed the commission's final report.
TERMS CLAUSE AT ISSUE
Commission officials also noted that the practice of using multiple insurers or reinsurers to underwrite a risk, a strategy known in Europe as coinsurance or coreinsurance, could in some circumstances run afoul of anti-trust regulations.
The strategy, a type of pooling, is designed to diversify risk. It also helps to increase capacity and the ability of the industry to cover large risks, according to proponents of the pooling model.
Insurance pools in Europe tend to cover property, general liability, auto and professional indemnity risks, and are most likely to be used in Germany, the Netherlands, Belgium, Finland and the United Kingdom, according to the commission. It is less relevant in Italy, the Baltic States, Hungary, Slovenia and Poland.
But EU regulators noted in their report that the industry's use of harmonization language to make sure a reinsurer obtain terms no less favorable than the terms offered to any other reinsurer participating in a contract, the so-called "best terms and conditions," or BTC, clause, was "likely to be to the detriment of the respective customers and might, under certain conditions, amount to a restriction of competition ..."
French and Dutch regulatory authorities are also on record for blaming BTC clauses for hindering competition, artificially raising prices paid by commercial insureds and preventing the market from freely setting the contract price.
Best terms and conditions clauses are used both in the insurance and reinsurance markets. They typically appear during the early quoting stages of contract negotiations and seldom appear in the final insurance or reinsurance contract, according to the commission.
FERMA membership is divided over whether such a clause amounts to anti-competitive practices. Citing "different opinions on the issue within FERMA," the organization has declined to take sides with regard to the best terms and conditions clause, according to an organization position paper published in May.
The commission, however, noted that, while it appears as if the use of BTC clauses is tantamount to aligning premiums and other contract conditions among insurers and reinsurers participating in a contract, the alignment or harmonization of contract terms and conditions is happening anyway through widespread industry practice.
Whether buyers are best served through the use of BTC clauses or not, it wouldn't hurt if the industry revisited its practices.
"The commission is aware that these practices have been considered normal market practice in certain markets for a considerable time," the report states. "The commission nonetheless believes that, in the light of its findings, the industry should engage in a critical reappraisal of the said practices."
CYRIL TUOHY is managing editor of Risk & Insurance®.
December 1, 2007
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