A new report claims that a hard market exacerbated by the impacts of the COVID-19 pandemic is exposing the “hopelessly conflicted and untransparent broker system” that developed during a prolonged softened market state.
Brokers receive up to 80% of their renumeration from insurers and just 20% from clients, says the report from Mactavish, creating the potential for a “huge conflict of interest.”
Specifically, the report discusses the fact that, as much of a broker’s renumeration is directly linked to premiums, with brokers earning more the higher premiums trend, an exacerbated hard market presents an obvious conflict between the interests of insurers and policyholders.
After a prolonged softened market following the fallout of the 2008 financial crisis, insurance premiums started to rise in 2019 as the market looked to reverse declining profitability.
It’s been well documented across the insurance and reinsurance industry that COVID-19 is likely to accelerate recent rate movements, which suggests that brokers stand to benefit from any COVID-19-induced rate increases.
“A hopelessly conflicted and untransparent broker system has been allowed to develop during a long soft market but it is now being brutally exposed. A hard market exacerbated by a once in a generation Covid-19 recession gives this anachronistic structure nowhere to hide – and in the absence of stringent regulator action clients must drive reform alone by taking greater control of their placement,” says the report.
One of the fallouts from the ongoing COVID-19 pandemic is the mismatch of expectations between policyholders and their insurers, especially concerning business interruption.
Policyholder frustration has increased amid the realisation that the large majority of standard BI policies simply do not pay out for a pandemic, owing to exclusions in contracts and the need for a physical trigger, such as a fire.
The report claims that conflicts risk leaving brokers acting as distributors for favoured insurers, which in turn can result in the use of “inappropriate” or “over-standardised” T&Cs, which, says Mactavish, has been exposed by the volume of failed BI claims.
Ultimately, the report calls on policyholders to run their own competitive tenders among brokers in order to obtain improved cover at lower rates.
“Brokers, like other professional service providers, are perfectly entitled to charge what they choose for the services they provide. However, current market practice means it is increasingly common for a broker to be paid a greater sum by the insurers, via a wide range of income sources, than the sum being paid by the client. Given the broker’s legal duties as an agent of the client, this creates the potential for an extraordinary conflict of interest,” says the report.