A discussion paper on simplifying regulation in the UK commercial insurance market has been issued by UK regulator the FCA. The sector takes about £95 billion ($122 billion) in annual premiums.

Commercial insurers have lobbied for years to change rules they say treat large corporate customers in the same way as retail customers with little knowledge of insurance. The FCA’s paper seeks to find measures that “strike an appropriate balance between safeguarding those customers who require regulatory protections, and competitiveness in the commercial non-investment general insurance market.”

The suggestion in the paper is that the compliance burden on bigger companies could be reduced by introducing lighter rules for the larger commercial buyers in areas such as private medical insurance, where there is currently no differentiation between retail and corporate customers.

There’s also a proposal to give the lead insurer responsibility for product governance in cases where a number of insurers underwrite a single policy.

Effective competition

The FCA said: “We aim to deliver proportionate regulation that potentially helps remove barriers to innovation and encourages effective competition in the commercial insurance market,” and adds that “larger organisations are likely to have their own insurance and legal expertise, and the financial power to negotiate with insurers on a more equal footing.”

Initial reaction from insurance industry bodies has been positive, with the London Market Group and British Insurance Brokers Association telling the Financial Times they saw the proposals as a positive move to introduce some proportionality.

But specialist insurance writer Chris Wheal said: “The idea that commercial clients all know enough about insurance to get the best deal is naïve.” His view is rooted in a story he broke as far back as 1999. It came, he says, as local authorities thought “they had a great deal buying insurance on a fee-only basis from the major brokers, with any commission earned from insurers paid back to the councils. Only when the councils shared information with each other did they discover they had all been sold the same packages.”

He went on: “It turned out that the brokers were also getting what became called ‘overriders’ where, on top of the individual commission, they received another commission on the total annual value of work placed with insurers.”

Commercial buyers

The key question, he says, is “How could commercial buyers know all the ins and outs of how insurers and brokers behaved?”

His solution is to “go back to the days when brokers were better regulated and had to act in the best interest of their clients. That way if you chose not to use a regulated broker the risk was yours.”

While much has changed since then, the central assumption that commercial buyers will have sufficient knowledge of the insurance industry remains. And with ‘better regulation’ often really meaning ‘less regulation’, it seems unlikely the FCA will follow the path Wheal suggests.

Comments on the proposals should be in by September 16, 2024.