Transparency is crucial to getting good value in the insurance market,writes Dorothea Dowling
To say that the cost of insurance in Ireland is too high for motor and liability is merely stating the obvious. We need to ask why and, even more importantly, what can be done about it?
The preliminary insurance study released by the Competition Authority on Wednesday is another step in the right direction towards resolving those questions. The study is welcomed by the Motor Insurance Advisory Board (MIAB). It represents implementation of another of the board's recommendations for which the Government published an action plan on October 27th, 2002. This study, undertaken by independent consultants, also supports many of the findings from the pro-bono work undertaken by the 20-person MIAB as published in April 2002.
Possibly the most talked about finding in the study is that the amount paid by insurers to brokers increased by an even greater rate than premium charges.
Commissions totalled €134 million in 2002, being 5 per cent of motor and 9 per cent of liability written premium income. Until 1999 there was a cap of 5 per cent for insurance agents on non-life insurance but this was abolished because the then attorney general advised that a limit was in breach of Article 85 of the Treaty of Rome. Comparisons of our overall commission rate at 6 per cent to percentages elsewhere in the EU must take into account that our premium levels are so much higher.
But, just like examining litigation overheads that add 42 per cent to compensation for injured parties, the figures themselves should not blind us to a more critical issue. Do these amounts represent value for money and, if so, for whom?
Gone are the days when anybody could set themselves up as an insurance broker. Regulation of that sector has now been formalised by the Irish Financial Services Regulatory Authority and is onerous - some would say, too onerous for non-life business.
Gone are the days when a broker could hope to thrive by operating as a mere postbox for client communication with insurers. Many brokers are now undertaking work that was formerly done by insurance company staff. The investment in electronic trading is a technological advance where efficiencies should deliver savings to all, especially consumers.
So is your broker worth the money?
The danger of not having a broker is that you might not seek alternative quotations at renewal. This risk of so-called consumer inertia is highlighted by research in the UK indicating that direct business is less likely to switch.
In Ireland we have the advantage of a regulation introduced for private motor from November 2002 that the policyholder must get at least 15 days advance notice of the renewal price with a "no claims bonus" certificate to enable shopping around. Now that motor rates tracked by the Central Statistics Office are showing a decline since June 2003 for the first time ever, many consumers are empowered to seek reductions and are getting significant savings - provided they demand them.
A good broker can be worth his weight in gold. At a recent Chamber of Commerce function, I was told of a number of cases where quotes for liability business were slashed because the broker searched for the best deal both in Ireland and elsewhere in the EU.
But how is a consumer to know whether the broker is earning his fees - and even how much he is actually getting in total? This brings us back to what might be described as the mantra of the MIAB report - transparency.
When was the last time your broker sent you details of the alternate quotations he secured for your business before he decided to recommend the one for which he is now seeking a cheque? Rare or never, is likely to be the response from the private policyholder.
Some commercial organisations will say that they require their brokers to give quotes net of commission and have an incentivised fee arrangement where the more the broker saves the client, the more the broker earns. There is an irony in the reality that percentage-based commission means the broker earns less if he gets the client a cheaper quote. What do you think might happen to house prices if estate agents got their fee from the buyer, rather than the seller, based on the reduction secured in the quoted price for the property?
So, should we abolish insurance commissions that are based on a percentage of the premium? And if we did (or could), what are the possible consequences?
Here we need to be careful about knee-jerk reactions. Because of a number of reforms already introduced and others in the pipeline, the cost of claims is set to fall further. There are levels of profits now in the Irish market that will attract new players - the study cites the two main reasons why more underwriters do not operate here as the claims environment and low profitability.
Both those factors have changed radically of late. Our best hope of accelerating competition is to attract new players. The study confirms that there are no formal barriers to any EU insurer underwriting risks in this country. The most likely way this will be done is through brokers rather than a new insurer setting up their own offices here. Lloyds' syndicates conduct significant business here through brokers. Further moves in that direction should be encouraged for the health of the Irish economy as a whole.
No matter how remuneration to brokers is to be calculated, the crucial issue is that consumers have a right to know what the broker is getting out of "Quote from company A" compared to "Quote from company B, C, D or E".
The MIAB had already designed a solution to this in its draft of a standardised renewal notice. That unbundling of every aspect of car insurance cost would show exactly how much the commission is, both in monetary and percentage terms. This could be modified for other classes of insurance. Additionally, the requirement for minimum advance notice could be extended to other classes of business, although more than 15 days would be required on many commercial accounts as the data on claims history can be more complex.
This would achieve two objectives. The client would know exactly how much the broker is getting and raise the question whether the service is worth it. It would also empower the client to compare what different brokers are charging for their services. And then the consumer can decide whether a broker is necessary if cheaper quotes can be obtained directly from an insurer. Surprisingly, MIAB surveys have found that despite the percentage the broker gets, they can get you deals that are not available otherwise.
The next stage of the Competition Authority study should prove interesting and the closing date for submissions is April 18th. "Consumers beware" only works when competitive arms are equalised by providing information that is the key tool to getting a better deal!
Dorothea Dowling chairs the Motor Insurance Advisory Board.