The Financial Conduct Authority (FCA) has published Wholesale Insurance Broker Market Study – Terms of Reference (MS17/2/1). The study will consider how competition is working in the insurance broking sector.The London wholesale broking market was last reviewed over ten years ago. There have been significant market changes since then including a prolonged soft market that has put pressure on commission as a percentage of premium. Facility arrangements set up by brokers over the past few years are intended to make the placing process more efficient but require underwriters to commit capacity for certain lines of business. In many cases such arrangements provide an enhanced level of remuneration for brokers. In addition to these facilities, brokers are also increasingly using access to market data to provide services to insurers such as advisory or consultancy services or administrative services such as data management.
Although these arrangements have the potential to deliver benefits to insurers and their customers, the FCA says that stakeholders have raised concerns that larger brokers may be using their powers to oblige insurers to sign up to facility arrangements or pay for additional services. Incentives may operate for brokers to place business in facilities but such placements may not always be in the best interests of their customers.
The FCA plans to assess how effectively competition is working in the sector and will look at how brokers influence competition in underwriting. The study will cover:
- Market power. The FCA will examine the impact of brokers having market power (meaning that they have the ability to raise the price of their services above normal competitive levels). The study will consider how easy it is for new firms to enter the London broker market or for existing firms to expand their business into new lines.
- Conflicts of interest. The FCA will look at conflicts in the sector and how competition and client outcomes are affected.
- Broker conduct. Certain activities undertaken by brokers, for example placing risks through facilities, may exclude smaller insurance firms from access to the market. The FCA will review the impact of these arrangements on competition. The FCA will also see whether there is evidence of coordination between firms.
The FCA welcomes feedback on the areas for review. There are questions for respondents to consider within the Terms of Reference. Views should be sent to the FCA by 19 January 2018.
Should the FCA find that competition in the wholesale insurance broker sector is not working it may intervene. It may do so through a variety of means including rules, guidance, proposing better self-regulation or introducing firm specific remedies or enforcement action. The FCA may also refer issues to the Competition and Markets Authority for further investigation.
View: FCA launches wholesale insurance broker market study