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In-depth – wholesale: Are wholesalers giving retail brokers a fair deal?

Transparency over remuneration and trust between wholesale and retail brokers are vital for the market to thrive

It has nearly been a year since the publication of the Financial Conduct Authority’s (FCA) final report for its Wholesale Insurance Broker Market Study

Three areas of concern were highlighted in the report – firms’ management of conflicts of interest; the information firms disclose to clients; and contractual agreements between brokers and insurers, where there’s a risk of limiting competition. 

So, has the market addressed the regulator’s concerns?

Shifting sentiment
John Needham, partner in the financial services division at PKF Littlejohn, was among those surprised by the FCA’s findings. He says that although he hasn’t seen much of a change in behaviours, or the rates being charged, he has noted a shift in sentiment in the wholesale market. 

“Generally, I think wholesale brokers are aware of the pressure they’re under in terms of the need to offer value,” he says. “We’ve seen a number of comments from senior wholesale broker leaders indicating that the market needs to offer more than just being a post box.” 

Retail brokers have also noted a shift. Juliet Williams, group SME director at SME Insure 360, says the wholesale market has tightened up a little since the FCA published its findings, with issues around capacity helping to drive this. 

“There are some issues with the market but we can get a fair deal,” she adds. “We need wholesale brokers and MGAs for the weird and the wonderful. Insurance is never straightforward and they can help with the more unusual risks.”  

Lack of transparency
Transparency is a key requirement when judging whether a deal is fair and, in line with the FCA’s findings, there is room for improvement. 

Charles Manchester, chief executive officer at Manchester Underwriting Management, believes that most retail brokers aren’t fully aware of the contents of their contracts with wholesalers. 

“I doubt that most have any interest,” he says. “They tend to look principally at the overall cost and value.” 

While these are important when finding cover for a more unusual risk, not having access to the finer details can be galling. 

“Wholesale brokers aren’t always very open about what they get out of the deal,” says Williams. “When it’s our client and we’ve done the work, this doesn’t always feel right.”   

It is a very mixed bag, though. 

Peter Blanc, chief executive of Aston Lark, says that some of the markets do a great job for retail brokers. 

“The wholesale brokers that we work with are very transparent and will always confirm what they’re earning and be open to discuss terms,” he says. 

If I’ve got a risk such as a stilt-walking fire eater or a herb seller, it’s not always easy to determine where I need to go in the wholesale market

Juliet Williams

stilt walking

Price points
Remuneration can be a particularly contentious part of this disclosure, especially when premiums are increasing. 

While a wholesale broker charging a percentage-based commission will earn more, the retail broker can sometimes feel under pressure to charge a fee to take some of the pain out of their client’s premium. 

“Wholesale brokers can make super profits in hard markets,” says Blanc. “I’d urge them to think about the end client: it’s not easy to tell a business owner their premium has increased from £50,000 last year to £150,000 this year. Wholesale brokers should look to reduce commission levels to help manage these problems.” 

Not everyone believes the financials are a significant issue, though. Manchester says that, in these markets, service and honesty matter more than price. 

“I do wonder if the retail broker or their customers realise the amount of expense in the chain,” he adds. “This might not matter, given how competitive the broker market is, provided wholesale brokers don’t earn secret commissions after agreeing a fee.” 

Disclosure discussions
There are signs that the wholesale market is actively addressing this lack of transparency on commission rates. Needham says his firm has had a number of conversations with wholesale brokers around how variable commissions and profit-related commissions can be disclosed. 

The FCA’s scrutiny may have provided some incentive for change but broader shifts in the insurance landscape are likely to have greater influence on how retail and wholesale brokers work together. 

Needham points to two features that could shape the relationship – market hardening and greater adoption of digital processing. 

“As risks become harder to place, there is an inevitability of price increases and this will take some of the pressure off the wholesale markets,” he explains. 

“On the flip side, as we see more digital connectivity, and with initiatives such as Lloyd’s Blueprint One, the processing side of wholesale brokers’ work should reduce, which could put pressure on remuneration.” 

Building trust 
However the relationship is shaped, there is room for wholesale brokers to increase trust in their services. 

For Blanc, this comes down to each side having a greater understanding of the other. 

“I’d like to see wholesale and retail brokers working more closely together,” he says. “If they spent time in each other’s offices, both parties would have a better appreciation of the challenges they face and the service that’s required.”

Greater transparency is also on Williams’ wishlist. She’d like to see more information being made available about the risks the wholesale market can cover. 

“If I’ve got a risk such as a stilt-walking fire eater or a herb seller, it’s not always easy to determine where I need to go in the wholesale market,” she says. “This has been exacerbated by consolidation in the market, with some of the wholesale brokers now being massive entities.”

While there’s clearly room to improve the way the retail and wholesale brokers work together, Manchester questions whether there is actually a lack of trust in the service provided by wholesale brokers. 

“Is there a lack of trust or is it really that retail brokers prefer not to sub-broke unless necessary?” he says. 

With signs that tougher times lie ahead for the insurance market, the relationship between retail and wholesale brokers will certainly be tested.

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