Broker Commissions: Fear and Loathing in the London Market?

Amid falling rates and rising costs, Atticus DQPro’s Nick Mair broaches the delicate matter of brokers’ commissions

 

This is another sensitive B word, well, two words actually, that nobody in Lime Street wants to talk about at the moment. Let’s face it there’s history here – and the mistrust and scepticism about broker commissions never really went away in some quarters.

But let me at the outset acknowledge that broker commissions are a critical cost component for underwriters struggling to reduce their expenses. It is agreed and accepted that commissions are part of the broker’s business model. However some in the London market view them with a sceptical eye, that they are a trade-off for the broker directing higher quality specialty business to the underwriter.

Here are granular three points that London Market carriers might want to consider.

  1. Do discriminate

Commissions vary considerably across specialty classes, as well as by timings, volumes, and the scarcity and quality of business. Considering all these variables, and their direct bearing on underwriter’s expense ratio, it’s surprising how many don’t monitor them as closely as they ought to.

Timings are an important consideration, which cascade into other variables. As well as an annual planning process in place at the start of the year, to decide what to underwrite, what to avoid, and to estimate the cost of commissions, real-time monitoring is also essential.

Real-time monitoring of broker commissions is something with which DQPro can assist, initially by checking that commissions fall within a range of estimates. Then, if underwriting teams are notified early when commissions fall outside estimates, they can track them more easily, and question why broker A has higher commissions than broker B for any given market niche.

  1. Avoid compliance headaches

The legal and regulatory risks associated with commissions have never gone away.

Lloyd’s currently faces a class action in Hawaii, an allegation that brokers received kickbacks through increased commissions for channeling surplus lines policies with artificially inflated limits, but rendered useless by lava risk exemptions.

Commissions can of course be used as subterfuge for bribes and money laundering, and this puts added onus on monitoring. –  Increased financial crime risks await premium-hungry underwriters eyeing new emerging markets business in Latin America and Asia.

All of this puts added responsibility on the role of monitoring and scrutiny, as part of the audit trail in the event of Lloyd’s, supervisors or lawyers knocking on doors investigating commissions. An automatic audit trail tracking commissions payments is an essential too.

  1. Commissions are rising fast

Rising commissions are a symptom of the squeeze on the broker business model in the London Market during the past two decades. Excess capacity and a soft market have created the underwriting conditions for broker commissions to flourish. Demand for good risks has risen, and carriers are prepared to pay.

This would not be a problem if expense ratios were healthy or if premium income was flourishing. However, neither of those things are happening so commissions continue to rise driving business away towards leaner, more efficient corners of the market. London’s loss will be Bermuda or Singapore’s gain.

Adopting a healthy daily routine for monitoring commissions and having the right controls in place is a good place to start. DQPro allows carriers to flexibly deploy the custom controls and checks they need, at scale and across classes and jurisdictions, to give a real-time view when estimates and controls are breached.

Brokers are intricate part of the global market and bring a lot of positive things to the table. The commissions agreed at the outset of the policy are, in essence, just a cost underwriters should keep close track of – but it is slightly shocking to me that some don’t do this at a granular level across individual policies, programmes and classes.