European Commission Questions Broker Transparency

The European Commission after a lengthy study has reported finding some questionable practices by the insurance industry including a lack of disclosure by brokers and an inherent conflict of interest presented by broker business models.

In its final report on the European Union insurance industry, made public Tuesday, the commission said that since brokers act as both a client advisor and distributor of insurance, the “dual role is a potential source of conflict of interest” between giving advice and the broker's business interests as a distributor.

Conflicts can arise from the broker's payments and contingent commissions, the report said.

The commission went on to say that the lack of disclosure of the compensation arrangements and “other conflicts on interest” can “create an environment in which business insurance clients, in many cases, are unable to make fully informed choices.”

Full disclosure would solve many of these conflicts, the report said, but currently where disclosure does take place “it does not appear to be complete, clear and understandable to the client.”

Relating to the underwriters, the report focused on layered insurance and reinsurance coverage, and was critical of “best terms and conditions” clauses noting that under certain conditions it could amount to restriction of competition.

While acknowledging that layered insurance programs increase capacity, it questions the benefit of pricing for the policyholder and that there may be a breech of European Union anti-competitive agreements.

The commission's report says that there needs to be a greater smoothing over of earnings noting that small and medium size lines appear to be more profitable than large accounts.

There are suggestions, the commission said, that brokerage commission plays a part in the profitability of large accounts because of the influence brokers with market margin can exert over the payment of commissions by insurers.

The commission noted that the property-casualty premium market in Europe amounts to $534 billion and that without insurance many businesses could not function, making it an important industry in the European Union.

The commission said it would not hesitate to use its enforcement powers if necessary, but it invited market and industry participants to come forward to discuss remedies before taking action.

In a statement, the law firm of Freshfields Bruckhaus Deringer noted that the report is low key compared to other enforcement actions. It said that enforcement actions on competition will take place across Europe and that the industry has some “real work to do” in some areas.

“In all, this report is unlikely to mark the end of the engagement between the commission and the insurance industry,” the international law firm said.

In the United States, the insurance industry was subjected to years of investigation and legal actions beginning in late 2004 that resulted in the payment of billions of dollars in settlements. The actions were taken over the lack of disclosure and allegations of kickbacks paid by insurers to brokers to steer certain accounts.