The Financial Conduct Authority (FCA) has commenced its
examination of the wholesale insurance broking market, and Fitch Ratings has weighed in on the potential impact to both insurers and brokers.
With competition the main focus of the watchdog’s study, here are the implications, according to Fitch:
- The FCA could help reverse the trend of rising broking commissions, benefitting London market insurers in the long term.
- If evidence of anti-competitive practices is found, say in the use of broker facilities, larger brokers are likely to be impacted negatively.
- Lower commissions also have the potential to boost volumes by making the market more competitive with international rivals.
“Many brokers are international, placing business in insurance markets worldwide, and it is therefore possible that aggressive measures from the FCA could prompt them to try to route more business to other markets,” added Fitch. “But we think the risk of this is limited because there is strong underwriting expertise for more complex risks in the London market and this is unlikely to change, at least in the medium term.”
Fitch also cited Lloyd’s of London data showing average acquisition costs rising from 17% of gross premiums written in 2005 to last year’s 22%. The credit rating agency highlighted that these costs are predominantly fees to brokers.
It added: “This has been in part driven by the prolonged soft market as falling premium rates put pressure on brokers’ commissions. However, acquisition costs are not the only cause of rising expenses, as insurers have also faced higher regulatory costs and have invested heavily in IT infrastructure in recent years.”
As for global competition, Fitch said the relatively high cost of doing business has seen a reduction in London’s share of emerging-market business versus the growth in local hubs in Singapore, Bermuda, and
Zurich. In Asia, for instance, figures from the London Market Group reveal a drop in London’s market share by 1.2 percentage points between 2013 and 2015.
While the credit rating agency described the outcome of FCA’s review as “highly uncertain,” with preliminary conclusions to be released no sooner than autumn 2018, it is ultimately hoped the probe results in industry competition that works well.
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