13 September 2017 Insurance

Transparency is needed to prevent brokers ‘double-dipping’

Over the next 12 months, regulators will be seeking more transparency on how brokers are remunerated amid concerns around the practice of “double-dipping” on commission, Mike Papworth, head of Asia and head of property/casualty at Miller Insurance Services, told Monte Carlo Today.

This refers to a scenario where a broker may receive commission on a placement multiple times, either because it is involved in placing both the insurance and the reinsurance risk or because it is collecting a fee from both the client and the company it has placed the business with.

Papworth believes this practice has evolved because margins have tightened in the last two or three years, and the practice is also becoming more common as brokers are trying to squeeze more out of transactions.

“This is one of the areas we hope the regulator steps in on during the next 12 months. Not only are they double or triple-dipping on commission, but there is also conflict as to who their actual client is,” said Papworth.

A broker carrying out the insurance placement of a big industrial risk, for example, might also make it compulsory that the insurer buys reinsurance from them as well. This would be one example of a broker taking a double commission.

And this creates conflict, suggested Papworth, as it shows a lack of transparency that is not in the best interest of the client.

It also creates issues from the regulator’s perspective, which might view it as a broker serving two clients under the same transaction.

“We’re challenging that, and would certainly like some transparency as to who the client is,” he said. “Is it the insured, or the cedant? And it cannot be both. It’s quite a regular practice, but to me there is a conflict.”

Papworth is an advocate of making it clear who a broker is representing at any one time. He said this is the case in transactions he acts on—there is never ambiguity.

He continued: “As a specialist reinsurance broker, my client is unequivocally the insurance company. I will provide financial services and tools to protect and insurance company’s balance sheet.”

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