Authority identifies areas for reform

Insurance companies will have breathed a sigh of relief yesterday when it became apparent that the Competition Authority had saved its ire for insurance brokers.

In fact, the big players can, with some justification, say that the authority's 18-month study of their industry has given them a clean bill of health.

Dr John Fingleton, the chairman of the authority, says he can find no evidence of cartel activity as evidenced by either collusion on price or the carving- up of the market by the big players.

This may seem almost surprising, given that two players control over 50 per cent of the motor insurance market, while 41 per cent of the liability market is held by two companies.

But, Dr Fingleton points out, the companies are not in a position to monitor one another's prices carefully enough for a cartel to work. The criticisms levelled at the insurance companies are in fact relatively minor and seem almost academic.

The height of the criticism seems to be that the way in which the insurers share information on claims and deal with hard cases and uninsured drivers may discourage new entrants into the market.

And, as the authority points out, the entry of two new players, Quinn Direct and St Paul, in recent years rather belies even this.

Unfortunately - for the insurance companies - it is not quite that simple.

Much of the blame for the lack of true competition among insurance brokers can be, and is, laid at their door by the authority.

Insurance companies rely heavily on brokers to bring them both motor and liability insurance business. Some 80 per cent of the €1.6 billion motor insurance market goes through brokers, while some 95 per cent of the €600 million liability market is also broker driven.

As a consequence, there is little incentive for insurance companies to force changes in commission structures as it could lead to a loss of business if other insurers do not follow suit.

As a consequence, insurance companies have allowed brokers ride the wave of increasing insurance premiums, without cutting their commissions.

Commission levels may have remained fairly static - 5 per cent for motor business and 9 per cent for liability business - between 2000 and 2002, but the total value of commissions paid by the industry have risen by 51 per cent in motor vehicle insurance and by 126 per cent in liability insurance.

This is on the back of a 21 per cent rise in motor insurance premium income and a 94 per cent increase in liability premium income.

Broker costs have undoubtedly risen during the period, but certainly not by an amount which could justify this.

The authority has identified a number of areas in which it thinks the operation of the broker market can be reformed.

They include ending fixed percentage fees and also incentives, such as minimum thresholds, which encourage brokers to concentrate business on one supplier.

The other area which has been targeted for reform is greater transparency from brokers about who they act for and also who they have sought insurance quotes from.

The authority hopes to conclude consultations on foot of yesterday's report within two months and come up with some recommendations within another two months

The temptation will be to suggest further regulation on what is already a heavily regulated sector, albeit without a consumer focus.

A solution that came from the insurance industry itself would be preferable.