The Financial Conduct Authority (FCA) is casting its regulatory eye on commissions in its Pure Protection Market Study.
While that work does not extend to private medical insurance (PMI), advisers operating in the sector are feeling the increased scrutiny from the regulator – not least due to having to question whether commission levels align with Consumer Duty.
As a result, many PMI advisers are calling for an alternative to the current front-loaded structures.
The subject of commissions came up in Health & Protection’s Individual PMI report in 2023 which indicated the current alignment of commission could be encouraging unwarranted switching.
And in a subsequent interview with Health & Protection last year, then Bupa UK Insurance CEO Chris Carroll revealed that while he understood the sensitivity around commissions, he was open to considering “anything that improves the sector”.
Though for any alternatives to work, they must be embraced by the whole industry, as the view from the sector is that the regulator is unlikely to be heading that way shortly.
More scrutiny around commissions
“There’s definitely more scrutiny around commissions right now and I won’t pretend that us advisers aren’t feeling that pressure,” Joanna Streames, owner of Velvet Mortgage and Insure Services, tells Health & Protection.
“The regulatory spotlight naturally creates nervousness and does feel incessant at times.” Streames adds.
An example of that increased scrutiny has come in the form of the Financial Conduct Authority’s (FCA) Protection Market Study.
But the regulator’s interim report from that study found that it does not expect to be making significant interventions including the banning of loaded premiums in the protection market.
It highlighted that loaded premiums and restricted panels were not creating worse pricing outcomes for consumers.
This was despite a quarter of new protection sales being conducted with loaded premiums and average commissions being 25% higher in loaded premiums.
PMI is exposed to the same risks as protection
For Kristian Breeze, director of healthcare at Ascend Health, the regulator’s absence of action in one area should not be read as approval in another.
“PMI is exposed to many of the same risks,” Breeze explains.
“If the regulator is serious about fair value and good outcomes, then the PMI market cannot be exempt from scrutiny.
“The question is not whether commissions are necessary. The question is whether the structure is fit for purpose.”
And Breeze maintains that at present, it is difficult to argue that front-loaded commissions encourage long-term stewardship.
“The model rewards new business more than client retention and that creates an imbalance. It influences behaviour on both sides of the value chain,” he continues.
“Brokers are pulled toward policies that allow them to replace revenue lost to cancellations or price rises. Insurers compete fiercely for new business yet increase premiums heavily at renewal. Clients then move to escape the price shock, and the cycle repeats.”
Alternative models
In terms of possible solutions, Breeze suggests alternative models would be welcomed by many advisers.
“A more balanced structure, where commission is spread over the life of the policy, would reduce churn and encourage brokers to build deeper client relationships,” he continues.
“A model that aligns ongoing revenue with ongoing service is more transparent and more sustainable.
“It also places pressure on insurers to manage renewals more responsibly, rather than shifting the friction onto intermediaries.”
Standardised rate
Advisers operating on the group side of the fence are also calling for alternative models to be explored.
Steve Ellis, joint managing director – corporate at Prosperis, tells Health & Protection: “Our view is that the industry should offer a standardised rate. Some of the leveraged terms can lead to problems with pricing and adviser behaviour.
“My preference is for the industry to take the lead and standardise rates. If the regulator intervenes the outcome could be difficult for advisers to implement.
“Commission should be taken out of the decision process. When earnings influence where business is placed, we could stand accused of not putting the best interests of customers first.”
Mike Hesch, head of UK employee benefits at Engage Health Group, tells Health & Protection he would welcome an environment where flat commission levels are in-force throughout the PMI industry, irrespective of whether the policy is new to an insurer or being renewed.
“If these commission amounts were unified across all insurers, we feel this would give the FCA, and importantly, customers, confidence that commission isn’t an influencing factor in any advice given,” he continues.
Restricted panels
But Hesch adds that he would also welcome a review by the FCA into the practice of insurers paying intermediaries to be included on their panel.
“If insurers are paying to be part of an intermediary’s panel and purchasing access to a clients’ consideration, are these funds realistically being shouldered by regular consumers of that insurer?“ he asked.
“If so, wouldn’t those funds be more ethically deployed to the end user, reducing the costs of their premiums, rather than to an intermediary who is earning a commission and/or fee already?”
Flat commission structures
Chiming in on flat commissions, Brian Walters, managing director at Regency Health, reveals they have been floated in the past but have never gained traction.
“This was due to the high cost of lead acquisition and the work involved in setting up a new policy,” Walters says, adding: “Commission is the only model that works in individual PMI and allows consumers to access advice and ongoing support that would not otherwise be available.
“There is an argument that commissions should be capped and I would welcome this, but this would impact the profitability of brokers who are reliant on lead generation.”
For Marcia Reid, non-executive director at Sherwood Healthcare, generally, PMI commissions and fair outcomes are already compatible.
“The FCA states that it is the impact of commission on customer outcomes that is key, and commission itself is not the issue,” Reid says.
“You could argue that a fee-based structure will not guarantee fair outcomes as intermediaries will be less incentivised to undertake reviews and there is no guarantee that the fee structure would be any fairer.
“However, if the FCA does decide to scrap commissions altogether then no doubt the market will adapt as needed.”
Commission not the focus
The good news is that commission does not appear to be the main driver for advisers.
And this is borne out in some market research conducted by Streames.
“I recently did some informal market research in my own broker WhatsApp and Facebook groups,” Streames reveals.
This included questions about what matters most when outsourcing part of their business to a network approved third party, including questions about commission levels, service to the broker, ease of doing business and overall value.
“What struck me was this – not one person focused on what commission they would receive,” she continues.
“Every single response centred on client outcomes in varying degrees – quality of service, transparency, speed, communication, long-term value, reflecting them well.
“Several said they would accept lower commission if it meant better outcomes for their clients and none of the questions related to clients, only to the broker using a third party so that was an eye opener and very reassuring.
“It tells me the industry culture is healthier than some of the external commentary suggests.”
And in any event, looking ahead, it appears the regulator is not in any hurry to cast its regulatory eye onto PMI commission anytime soon, according to Walters.
“Given that the indefensible practice of loaded commissions in protection has survived TCF [treating customers fairly], Consumer Duty and now a Market Study, I think it unlikely that the FCA will turn its guns on PMI commission,” he concludes.