Rules setting the maximum level of commissions that insurance companies can pay brokers who sell general insurance have been lifted, without any requirement to disclose to consumers the commissions paid. Any attempt to bring in disclosure requirements for general insurance commissions will be resisted by the Irish Brokers Association. Ministerial orders setting the maximum levels of commission that can be paid on motor, employer and personal liability and household insurance were re moved from October 1st by the Minister of State for Enterprise and Employment, Mr Noel Treacy. Under section 37 of the 1989 Insurance Act, the Minister has power to set maximum commission levels. For example, the maximum commission allowed on motor insurance was 5 per cent.
While some industry sources said they expected regulations "in due course" to require the disclosure to consumers of commissions paid to brokers, the Irish Brokers Association has said it will lobby strongly against any requirement to disclose commissions on general insurance business.
IBA chief executive Mr Paul Carty said there was no connection in the IBA's mind between the removal of the ministerial orders and the disclosure of commissions. Mr Carty contended that there was a fundamental division between life and non-life or general insurance products.
General insurance was like any other retail product, he argued, adding that asking brokers to disclose commissions would be like requiring retailers to disclose their margins on every product. However, because life business involves investment and policies where investors expect a return, the IBA supported proposed legislation for full disclosure of commissions and other costs.
Disclosure of general insurance commissions could distort the market, he maintained. A broker earning commission of 25 per cent might be providing full service to the insurer including administration, issuing policies, collecting money and might have limited power to settle claims, while a broker getting 5 per cent might be just introducing business to the insurer. Disclosure would distort the consumers perception of the brokers, he argued.
Asked about a danger that customers could be sold unsuitable products because a broker could earn more commission on some products, he strongly rejected any suggestion that consumers would be disadvantaged by the removal of the maximum orders without any requirement to the disclose commissions.
"There could be a danger in theory, but in reality competition is cut-throat and there is nothing to prevent any client asking a broker what commission he/she is earning. If the broker refuses to tell, the client can just go somewhere else, there are plenty of alternatives," he said.
The public "are well equipped" to protect themselves, Mr Carty insisted. There was plenty of competition in the market and "the direct insurers will fillet us if we take too much commission", he insisted.
The Irish Insurance Federation expressed surprise at the timing of the lifting of the maximum commissions orders. While the companies wanted the freedom to set the rates they paid brokers, a spokesman outlined two possible negative consequences for consumers in lifting the maximum orders.
"If there are no restrictions commissions are likely to increase and this will impact on the price of insurance products - that is what has happened in other markets when restrictions have been lifted even when disclosure was included as part of the package," he said. The other possible impact on consumers could come from misselling by unscrupulous brokers - selling on the basis of the commissions they can earned rather that the best product to meet the consumers needs, he suggested. "It would be better if the temptation was not there," he said.
Questioning the timing of the lifting of the controls, the IIF spokesman argued that motor insurance premiums were on the way up anyway because of rising accidents and costs of claims and the removal of the maximum commission orders would push prices even higher for the consumer.
While the IIF did not see disclosure as a substitute for limiting commission levels, the spokesman questioned why the Minister had decided to remove the maximum orders now. "Even if there was legislation on disclosure by the end of the year, realistically with the lead-in time to change systems to produce the information, it would be at least the middle of next year before the information could be made available," he suggested.
In the life assurance sector, the maximum commission levels agreed between life assurance companies were struck down by the Competition Authority in February 1998, but legislation is not expected for another six to nine months to establish rules for the disclosure of commissions and other information to consumers.
