A new report from Mactavish, the specialist insurance buyer and claims resolution firm, has exposed “huge conflicts of interest” for brokers, as they derive as much of 80% of their revenue from insurers while only 20% is composed of fees from their clients.
The paper, entitled ‘Broker Conflicts’, also reveals that much of a broker’s revenue is directly linked to the price of premiums so they benefit when insurance costs rise, which is currently happening partly because of the coronavirus crisis.
Based on analysis of FCA data, Mactavish estimates that potentially around one quarter of the 80% is legitimate commission leaving at least 60% of broker income in total being both premium linked and based on services to insurers rather than policyholders which is untenable as a market structure as the Covid-19 crisis has exposed.
In its new report, Mactavish also highlights that intermediaries have increasingly started to use over-standardised policy terms, which are often pre-defined as part of a broker scheme or facility that sees them work with a small group of preferred insurers on mutually beneficial financial terms.
This has led to an increased use of generic policies that are often not adapted for client needs, and this long-standing problem has been brutally exposed by coronavirus, with blanket refusals by insurers to pay the business interruption claims that companies across the country were counting on.
Bruce Hepburn, CEO of Mactavish, said: “The coronavirus crisis has exposed huge mismatches in expectations between policyholders and their insurers in terms of whether claims should be settled. We have become increasingly critical of the small print in insurance contracts and believe the current problem of coronavirus claims being rejected highlights this issue well.
“It is only right that the role played by brokers in negotiating between insurers and their customers is reviewed, which is why we have published our report today.
He added: “It asks hard questions about the role of the broker, how they earn their money and who pays them the most and reveals some shocking conflicts of interest that urgently need to be addressed by policyholders in terms of the way they manage their broker.
“Prior to Coronavirus, the insurance market was becoming increasingly unstable after years of declining profitability, which meant insurance premiums were beginning to rise. The current crisis will supercharge insurance rate increases as well as cover reductions to help pay for the flood of claims and insurers’ loss of investment income.”
Last week Lloyds of London predicted a $200bn hit to insurers from the crisis driving the same type of insurance market disaster that followed 9/11.