On 10 December 2007, the FSA announced a further programme of work to consider possible inefficiencies in the commercial general insurance market before taking a decision on whether to mandate commission disclosure.
Under the FSA’s current rules a commercial insurance broker must disclose commission information if the client requests it. In March 2007, the FSA commissioned CRA International (CRA) to conduct a cost benefit analysis into whether commission disclosure should be made mandatory. The subsequent research suggested that mandating commission disclosure by itself would not be justifiable on cost benefit grounds. CRA also found a lack of transparency in commissions paid to intermediaries in the commercial general insurance market that highlights market imperfections.
In 2008, the FSA’s work in this area will focus on measures aimed at improving the quality, clarity and consistency of key disclosures made by firms to their commercial customers; thematic work on conflicts of interest; publication of a discussion paper inviting views on the cost-benefit analysis of mandatory disclosure and commercial customers’ awareness of commission disclosure. Any measures taken will take into account the European Commission’s review of the Insurance Mediation Directive.
The British Insurance Brokers’ Association has expressed frustration that even after a forensic review proving that the costs of mandatory disclosure fall disproportionately on smaller firms and exceed the benefits of disclosure, the FSA is continuing to spend time and resources on this matter.
Commercial insurance commission disclosure: market failure analysis and high level cost benefit analysis: the right decision matters, CRA International, December 2007 is available for review here.
