The UK’s insurance industry faces fresh scrutiny from the financial watchdog amid concerns that customers could be getting a bad deal from brokers.
The Financial Conduct Authority said on Wednesday that it would conduct an in-depth review of the £68bn wholesale insurance broking market after “significant changes” in the sector since the regulator’s last probe a decade ago.
The FCA said it wanted to ensure that competition was working effectively so that London remains an international centre for the insurance business.
It said a prolonged period of “soft” activity since the financial crisis meant that capital flowing around the financial system has been desperately looking for a return as interest rates have remained low.
Lots of capital available to underwrite claims in the insurance industry has helped keep the prices of premiums low, but has prompted brokers to look for new ways to make money. Some of these methods may have reduced competition, increased risks and may not be in the best interests of customers, the FCA said.
Brokers traditionally act as middlemen but in recent years they have increasingly signed customers up to extra services like insurance advice and analysis, the FCA said. Some industry figures have expressed concern that large brokers are using their power to pressure customers to sign up to these services, which they may not need.
The regulator also said it would investigate the increased use of “facilities” which often entail a broker grouping together lots of different types of risk and signing up an insurer to commit a certain amount of money to pay out on potential claims.
This frequently happens before the broker has found the clients to insure and means that insurers have no discretion or visibility of the underlying risks they are agreeing to pay out on, the FCA said.
Christopher Woolard, the FCA’s executive director of strategy and competition, said: “Given the size of the wholesale insurance sector and the type of large scale risks it covers, the way it functions can have a wide-ranging impact on the broader economy.
“If businesses cannot get appropriate cover or pay more for services than they should, it can impact on their ability to operate and grow.
“Brokers play an important part in the wholesale insurance sector ensuring clients get appropriate coverage at good value. However, following significant changes in the sector, we are looking at the dynamics to ensure competition is working well.”
The FCA invited responses to the outline of its review and said that it aims to publish an interim report in autumn next year.
