There is a difference between being aware that a regulator could take an interest and the reality of your regulator taking an interest
When you hear that fees on broker facilities are falling and that enhanced commissions are starting to slide less than a year after the FCA started a wholesale insurance review, there is a temptation to draw a strong causal link.
But, as difficult as it is to divine people’s motives, I think if we were to advance this link, we would be falling victim to the post hoc fallacy.
In other words, just because B happened after A doesn’t mean that A caused B.
There are a number of factors at play when it comes to the squeeze on market-derived income, but the biggest is the current state of the market.
The London market’s underwriters are increasingly distressed, and deals that they agreed to in 2015 or 2016 to maximise distribution do not make sense today.
Writing a class-specific quota share that is projected to run at a 102 percent combined ratio inclusive of 10 points of enhanced commission makes no sense. But perhaps at 5 points of enhanced commission it just about does.
If loss ratios will no longer allow insurers to underwrite profitably with the same acquisition costs, then ultimately acquisition costs will fall or underwriters will simply walk away.
The zero-tolerance approach the Corporation of Lloyd’s has started taking towards the market is only likely to accelerate this dynamic.
An increasingly relentless focus on cost is also prompting insurers to scale back their outlays on data and consultancy services sold by brokers.
Sources have said that, in some cases, this means prices for such services are falling, or – where there is a fixed pricing framework – the work done is being scaled back or discontinued.
The regulatory environment is not irrelevant to the changes, even if it is not the prime driver.
The brokers have always been aware that there is regulatory risk around market-derived income, and they have acted accordingly stretching right back to Marsh’s Project Blue and Aon’s Berkshire Hathaway sidecar.
They set themselves the task of creating structures that improve client outcomes and manage conflicts of interest, while satisfying the need for full disclosure.
Whether the regulator judges that they have acted as they should have or if they have in cases too zealously pursued market-derived income remains to be seen.
Nevertheless, there is a difference between being aware that a regulator could take an interest and the reality of your regulator taking an interest.
There are no massive exercises under way to clean house – and we have struggled to find examples of anything at all changing at Aon – but the minds of boards and management are more focused on the compliance aspects of facilitisation and data services even than they were before.
And there are instances where that means that work is being done to bring facilities into line with a common framework and set of guidelines. There is no bonfire of the facilities and the changes do not seem to be revolutionary – but things are moving.