Insurance is now a premium industry
The world of the insurance broker or agent has changed radically since the Financial Services Association (FSA) introduced its controls in 2005, says Peter Nash. And that change is very much for the better.
When the FSA took over from the – apparently toothless -Insurance Brokers Registration Council (IBRC), it brought the insurance industry together under the one roof.
Previously underwriting and insurance agencies didn’t have to be controlled, which left various paths down which the unscrupulous could meander to escape notice. The easiest way was to change the company name to Joe Dokes Underwriting, or John Doe Insurance Agency and slide past the IBRC controls.
Talking to Denovo’s John Dodd, it seems the FSA immediately told the industry if you’re an insurance intermediary by any description, you’re now subject to controls with effect from 14 January 2005.
And they wrote an 18,000 page handbook. “But that applies to banks and all sorts of other financial actions as well,” said Mr Dodd, “and out of those 18,000 pages there were something like two or three thousand pages that applied to insurance brokers or insurance intermediaries.”
While an 18,000-odd page handbook might be comprehensive, it’s also brought a new earning opportunity to the finance industry.
“There are companies that have specialised in learning the ins and outs of the FSA rules to the nth degree,” says Mr Dodd, “to such a level that they actually train people and act as consultants to give guidance on how the rules are applied.”
Enormously complicated
Such an enormously complicated set of regulations also places an enormous burden of compliance onto small businesses – up to five or 10 people. Most small businesses can’t afford to employ a dedicated compliance officer.
So the FSA decided to apply proportionality – small companies still had to comply with the rules, however their method of compliance and the way they comply would be less regimented. But they were still required to show they had complied.
The next big change brought about by the FSA was to insist on a minimum requirement for free capital funding in the business. Depending on whether the business held what are called client’s premiums or had what’s called risk transfer on the premiums the business collected.
The amount a business has to have as free capital varies. Broadly speaking, if a business has risk transfer for everything it collects, it has to have a minimum of £10,000 free capital after all the business obligations have been met.
If the business holds client funds - premiums being paid to the underwriters where risk transfer does not apply – it has to have to have £20,000+ in free capital.
“In financial terms we’re obliged to complete what’s called a Gabriel form,” said Mr Dodd. “It used to be called the RMAR and is now called a Gabriel. And a Gabriel is a complete return of the financial situation of the business. That report is exhaustive. It doesn’t just deal with the P&L accounts and balance sheet, it deals with a number of other things as well.”
It’s to give the FSA a really close view, not just of the finances of the business, but of the way the business operates, particularly if it’s operating in sensitive areas. “Motor and personal insurance, for example, the FSA tends to pay much closer attention to because it’s an area where most complaints emerge from,” commented Mr Dodd.
Recent furore
Uppermost in most people’s minds will be the recent furore over Payment Protection Insurance. Which brings us to the second thing the FSA brought with it - the Financial Services Compensation Service and the Ombudsman.
“The maxim for that is we must protect the good name of the financial services industry at all costs,” said Mr Dodd.” Therefore, if one of them does something naughty, all the others will fund the cost of any deficit.”
The banks made a killing on PPL, so the FSA banned it. The government said everyone had to be compensated and the FSA said it would collect a share of the compensation costs from every single insurance agency in the country.
“My contribition to the FSA compensation service two years ago was a matter of three or four hundred quid,” said Mr Dodd. “Last year it was over three thousand pounds.”
But the FSA has strenghthened the financial probity of the industry; it’s shown that if people are selling a type of insurance that doesn’t do the job properly and isn’t treating people fairly the FSA will kill it.
“I don’t disapprove of that,” said Mr Dodd. “I think the better people are made to run their businesses, the better the consequences for the people who run those businesses.”
