The Australian Securitiesand Investments Commission’s (ASIC’s) probe of remuneration practices among general insurance brokers has uncovered conflicts of interest, but no widespread abuse.
The probe was launched in November last year in the wake of New York Attorney General Eliot Spitzer’s damning findings on practices in the US broking community. Australian sources had not expected ASIC to unearth anything too unsavoury, but there was cause for concern from the findings.
ASIC found deficiencies in management of conflicts of interest and remuneration disclosure, while the practice of paying brokers volume bonuses or other contingent remuneration was found to contain inherent conflicts.
“ASIC found that more than half the brokers reviewed had contingent remuneration arrangements in place and most of those brokers placed a significant proportion of their business with insurers that paid extra commissions based on the volume of business placed with them,” said ASIC’s executive director of compliance, Jennifer O’Donnell.
Domestic law requires brokers to inform clients of remuneration incentives paid by insurers. While disclosure may avert the issue, where there are contingent and preferential arrangements in place, ASIC said the only way to avoid the inherent conflicts may be to avoid them altogether. As a result, brokers can expect to be under closer scrutiny from insurance buying risk managers and ASIC itself.
“The review noted that contingent commission arrangements have increased, so the management of conflicts of interest and disclosure of remuneration by insurance brokers will continue to be the subject of regulatory scrutiny,” said O’Donnell.
The findings follow a series of damaging investigations which have dented the insurance industry’s image both at home and overseas. Recently Lord Levine, chairman of Lloyds of London, warned insurance executives that they must play a key role in repairing the industry’s battered reputation.
Conflicts of interest, such as those probed by Spitzer, should be eliminated. This can be achieved by fostering increased transparency. “In the case of the insurance investigation, it’s the issue of the broker receiving payment from both the client and the insurance carrier,” he said. “In the banking sector, it was the analyst giving false stock information to investors in order to get access to lucrative investment banking business.
“Suddenly the question of who is working for whom is blurred and confusing. But if we are to retain the confidence of the key player in all of this – the customer – we need full disclosure and complete transparency about who is doing what exactly, for whom, on what terms and at precisely what cost. Indeed, without it, you simply do not have the economics on which to base accurate, efficient management decisions.”
Anecdotal evidence suggests that some brokers have ceased accepting contingent commissions, but ASIC remains concerned about levels and sophistication of disclosures. Brad Greer, president of RMIA, which represents many insurance buying risk managers, said there are fears that bad practices are more widespread throughout the industry, despite ASIC’s limited findings.