Insurance brokers' incomes have risen sharply following rises in their commission rates, but insurance companies are reluctant to take action for fear of handing competitive advantage to a rival, the Competition Authority said yesterday,writes Barry O'Halloran
Consumers paid €134 million in commission to insurance brokers in 2002, a preliminary report on competition in the non-life sector released yesterday found. Authority chairman, Dr John Fingleton, said reform of the broker market alone could cut "tens of millions of euro" off the amount that consumers and businesses are paying for insurance.
The report shows that in the four years from 1998 to 2002 (the last year for which figures are available), brokers have been taking an increasing proportion of the overall insurance bill in both the motor and liability markets.
In motor insurance, average broker commission grew from 3 per cent to 5 per cent, and broker income jumped from €35 million to €76 million. The overall value of the market in 2002 was €1.6 billion.
In liability insurance, commissions dropped from 8 to 7 per cent between 1998 and 2000, before rising again to 9 per cent two years ago. In that period, broker income rose from €25 million to €58 million.
The figures show that brokers' fees have been rising faster than the actual cost of insurance for most of the last decade. Dr Fingleton pointed out yesterday that, between 2000 and 2002, insurance costs rose by 21 per cent in the motor market, while commissions increased by 51 per cent. During the same period, liability premiums were 94 per cent higher, while commissions jumped by 126 per cent.
The Government abolished a cap on non-life insurance commissions of 5 per cent in 1999, as it breached EU competition law. However, the authority's report states that the move does not appear to have introduced rate competition among brokers.
"We conclude that there is a potentially serious concern with how competition operates in the broker market for both liability and motor insurance," the authority's report states.
Dr Fingleton said part of the problem was that consumers did not know how much they were paying insurance brokers when they bought policies. The report says the charges brokers impose on customers are not recorded in the returns insurers make to the State.
He also argued there was a conflict of interest involved in the brokers' role. Dr Fingleton explained that, while they are statutorily obliged to give consumers the best advice, the percentage-based commission system that the majority of the State's 2,500 brokers operate means the more expensive the policy, the more they earn.
He acknowledged that insurance companies were going along with the system. "It's clear that the insurers have no strong incentive to try and bid down the fees paid to brokers," he said. No company was willing to cut commissions or switch to a straight fee system because this would make it less attractive to brokers than its competitors and result in a potential loss of business.
The Competition Authority chairman recommended that consumers ask brokers for details of their commission and the actual cost of the insurance policies. He also argued that the introduction of a transparent, simple fee-based system could lead to reforms in this sector. "A cut of just 7 or 8 per cent in commissions could result in savings of €10 million for consumers."
The two organisations representing brokers last night strongly rejected the authority's findings, arguing they were too narrow.
The Irish Brokers' Association said its costs were just 6 per cent of premiums. "This is the lowest percentage in any of the developed European markets and it includes the work brokers perform on behalf of insurers as well as clients," an IBA statement said.
Professional Insurance Brokers' Association chief executive, Mr Diarmuid Kelly, said the report failed to address "the near monopoly situation that operates in the general insurance market".