Chris Worrall was interviewed by Kate Beaumont for LexisNexis. The following interview was first published on Lexis®PSL Insurance & Reinsurance on 23 November 2017.
Why has the FCA launched this market study now and why is it exploring individual broker firms’ market power? What is the FCA concerned about exactly?
It has been around ten years since the wholesale insurance broker market was last examined in detail by the FCA’s predecessor, the Financial Services Authority (FSA). Since then there have been significant changes to the industry, including the increased use of alternative placement facilities in the London insurance market and brokers now offering a wider range of services, such as advisory, data and analytical services to insurers.
Concerns had been raised by stakeholders about these developments, for example that larger brokers may be using their market power to oblige insurers to sign up to these facilities or pay for the wider services.
The FCA announced its intention to carry out a market study in its 2017/18 business plan, and according to its terms of reference (published when it launched the market study), the three main topics that the FCA intends to explore are:
- market power of individual broker firms
- conflicts of interest
- broker conduct, and what impact this has on competition in the industry.
Are there any known (or suspected) sub-segments within the sector with fewer active players that give rise to the concern around lack of competition? Are conflicts of interest a focus of the FCA’s concerns?
The wholesale insurance broker sector has been defined broadly by the FCA — it intends to include UK and overseas risk business placed by brokers with Lloyd’s syndicates and insurance companies operating in the London insurance market. The FCA will examine large, complex or specialist risks which usually involve an element of bespoke pricing and coverage, and will focus on cover purchase by large corporate clients based in the UK and overseas. The study will also cover facultative and treaty reinsurance.
As part of the study, the FCA plans to explore whether there is evidence that competitive conditions differ by sub-segments in the industry. These sub-segments may be defined by combinations of differing factors such as type or risk, geographical location of the end client and the type of end client.
While no specific sub-segments have been highlighted at this stage, according to the FSA’s previous study, the market share of the largest four international intermediaries varied between 45% and 85% depending on the size of the client. The FCA considers that if the market is sub-divided these levels of concentration could be significantly higher in some segments.
In addition to exploring market power, the FCA intends to consider the potential for conflicts of interest in the market. The FCA is concerned that when brokers choose insurers for their clients there may be incentives to choose the insurer that provides them with the most remuneration, rather than the most appropriate insurer for the client.
The FCA is in particular looking at potential concerns relating to brokers’ practices in placing business with facilities— brokers favouring insurers that obtain other services from that broker, brokers tying subsequent reinsurance services to the original grant of business to an insurer, and practices when both the broker owned managing general agent and the parent broker are acting for a client.
What role do facilities hold now in the wholesale market? How does the use of facilities in the wholesale market exclude smaller firms?
In addition to the traditional types of facilities, such as line slips and binding authority arrangements, there has been a widespread increase in alternative facilities such as broad market follow facilities and specialised facilities which provide bespoke solutions. The use of facilities is now reportedly making up to 20 – 40% of the business placed by larger brokers. The FCA considers that broad market follow facilities may be particularly concerning as they take a percentage of follow capacity (often 10 – 20%) across a wide range of risks and classes, without the insurer having discretion or visibility over the underlying risks.
Facilities can create products that offer enhanced coverage which better meets a client’s needs, reduces costs and increases the speed of placement. However, the FCA considers that this could potentially be detrimental to smaller firms by excluding them from the market. For example, the pre-arranged nature and scale of a facility can create pressure on an insurer to either sign up to the whole facility or forfeit a significant volume of business to competitors, and smaller insurers may not have the underwriting capacity to take part in these facilities or to pay the increased remuneration costs often demanded by the broker for providing guaranteed business.
What are the next steps? For example, when are views due in, and what is likely to happen if the FCA finds that competition in the wholesale insurance broker sector is not working?
While the FCA is not formally consulting on its terms of reference, it included questions for consideration and welcomed any feedback on the topics that it plans to explore by 19 January 2018.
The FCA will shortly start gathering information and seeking views from industry participants, with the aim of publishing an interim report in autumn 2018. This interim report will set out the FCA’s analysis and preliminary conclusions about how competition is working in the wholesale insurance broker market, including where practicable and appropriate any possible remedies to address concerns identified.
Remedies may include market-wide remedies (such as amendments to existing regulation or enhanced industry self-regulation), imposing firm-specific remedies or enforcement action under either the Financial Services and Markets Act 2000 (FSMA 2000) or the Competition Act 1998. The FCA may also choose to refer the market to the Competition and Markets Authority for further investigation, as it has recently done with the investment consultancy market.
Are there any other points of interest worth mentioning here?
The study follows the FCA’s recent high profile antitrust investigation into aviation insurance broking, which the European Commission took over in October 2017.
The FCA is using its powers under FSMA 2000 rather than the Enterprise Act 2002, and as such is not bound by a statutory deadline of 12 months in which to complete the market study.
Co-authored by Becky Ellis, a solicitor in the competition team.