I will make the presentation on behalf of the IBA. I am joined by Paul Lynch, the chief executive of the IBA andDonagh McSharry, our deputy president. Members of the committee know our credentials. I will not labour them, but I point out that we have 500 member firms which employ approximately 5,500 people. More than 85% of the member firms of the IBA are regulated by IFSRA as authorised advisers, which is the highest professional designation available in Ireland, but that is not to say it is a big boys' club. It is very much the opposite because 85% of the members of the IBA have fewer than ten staff members, a fact of which it is important to be aware. It is a representative organisation with high standards.
On behalf of my colleagues, I wish to say we are happy to be back here. We are delighted to have this opportunity to meet members of the committee again. When we met last July we had a constructive and useful exchange of views. We read with great interest the report that emanated from the committee soon afterwards.
We prepared a brief presentation, covering the main points we wish to make, which we have given to the clerk of the committee. I will refer to the submission and briefly refer to some of the interesting issues raised in the committee's interim report last year, which are pertinent to today's discussions.
On the subject to barriers to entry, the committee noted in its interim report that there is evidence that personal motor insurance is focused on only a few insurers who enjoy dominant power. There was some suggestion that the same is true on a de facto basis in regard to liability insurance due to the oligopolistic structure of the market. No systemic barriers to entry exist but the committee found that general conditions were not conducive to the encouragement of new market entrants. It recommended that the Competition Authority should examine it further and remove any barriers to entry. The authority did so and broadly endorsed the view of the committee.
The authority has added its view that potential new entrants are disadvantaged by lack of data, which are in the hands of their competitors, the existing players, and also by solvency requirements which are penal by reference to solvency requirements for existing players. Our view on this, which we have made known to the Competition Authority, is that while we are not criticising the insurers who stayed in business in Ireland when others withdrew from it, that concentration of power in the hands of the few who are left is a reality and it is not in the best interest of consumers. It increases the challenge facing brokers to get good deals for our clients in a contracting market because the market continues to shrink and customers need more than local insurers can provide.
IFSRA needs to ensure that potential new entrants are not disadvantaged in regard to access to data, solvency margins or other regulations. IFSRA also needs to ensure that Irish policyholders are adequately protected against the failure of an insurer regulated by it. The Government needs to take steps to ensure that there is an effective EU-wide protection scheme to cover Irish policyholders of any insurer regulated elsewhere.
In regard to access to markets, the committee's report commented, as did the Competition Authority's report, that the practice of some insurers of setting minimum production targets for brokers to retain their agency has the potential to put brokers in the position of putting their clients' best interests second instead of first. That is a serious issue. We have commented on this to the effect that research shows that IBA brokers put their clients' best interests first by placing business with the most competitive insurer available to them.
Brokers need access to a range of insurers to be able to offer clients choice. If insurers do not make their products available to brokers who do not have a great deal of business to offer, it reduces the choice available to clients of those brokers. The nature of the Irish market is such that personal and small business clients like doing business with local brokers. There are over 1,000 general insurance brokers regulated by the IFSRA, the vast majority of which are small and locallly-based. It must be borne in mind that local brokers do a great deal of work that used to be done by insurers. In the distant past, insurers had many local offices but these have been closed down over time. The only local service available to many people is through their local broker. Some insurers have been closing the accounts of local brokers unless they can guarantee minimum production levels and, in some instances, minimum levels of profitability. If this movement continues, the inevitable result will be fewer local brokers, reduced choice, advice and service for local business. We believe that this is not good for community business in Ireland and needs to be controlled. On a positive and pragmatic note, the IBA has an outstanding reputation, through its members, for seeking out and introducing new capacity and niche and specialist capacities to enhance the choice available to Irish policyholders through their brokers.
I will now turn to the questions raised by the Competition Authority. In broad terms, the authority was concerned about commission payments, as a system, transparency and disclosure and competition within the marketplace. As regards competition, we must ask whether brokers are a force for competition. The competition authority acknowledged in its initial report that brokers are a huge force for competition and that they encourage competition, reduce searching and switching costs, bring lower prices to the attention of customers, etc. However, we do more than that. Not only do we work the entire local market for our clients, we also search out overseas markets. IBA brokers, particularly the larger ones, provide a critical infrastructure for overseas insurers who want and are prepared to do business here but who are not prepared to establish a branch infrastructure in this country. Without the necessary activities of these brokers, Irish clients and businesses would be paying much higher premiums than they do to fewer insurers and some would have no cover at all.
Is the broker market competitive? Absolutely. More than 2,500 firms are regulated by the IFSRA, 85% of them locally-based and employing fewer than ten people. They are not there to help each other, they are there to compete. That point must be accepted.
Are commissions too high? The Competition Authority's report points out that commission rates are the lowest to be found in any of the developed markets. The statistics in this regard are included in one of the slides in the report. Do we give value for money? We have carried out independent research on this matter and the feedback from customers is that we score well. It seems that customers who have the experience of using brokers know the value they are getting. In slides 21 to 23, inclusive, members will find the value for money survey. In the category"Excellent to Good", brokers came in at 53%, while insurers came in at 23% in the perception of customers in terms of giving value for money. On the quality of service offered, brokers scored 72%, while insurers scored 49%. We did not make up these statistics.
As regards competition rising sharply in a couple of years, the point has been made on a number of occasions to the committee — I take this opportunity to reiterate it — that it is widely acknowledged that the so-called findings in the Competition Authority's preliminary report were flawed. The statistics given are inaccurate.
It is worth re-emphasising that over a number of years a huge amount of work that used to be done by insurers has been transferred to brokers. Some of that relates to, for example, electronic trading. It has resulted in lower costs for insurers and higher costs for brokers. This has meant that some commission rates, for example, those relating to motor insurance, have moved to reflect that fact. It must be acknowledged that commission rates for motor insurance dealt with electronically are higher.
What about transparency? What the client needs to know is the cost of the product. That is very transparent. He then needs to know that he can shop around, that there is a competitive market and that he has a choice. Digging into selected elements of the cost does not help the customer because it does not change the price. In fact, it tends to confuse customers into making the wrong choice. That assertion is supported by research and is endorsed by a number of agencies, including the FSA in Britain, which has decided that the compulsory disclosure of commissions is not in the best interest of consumers and it is not going to do it. The FSA has carried out a great deal of research on this matter.
The IBA is on record as saying that it is not afraid of transparency. I reiterate that point. However, if there is to be transparency of distribution costs, it must be applied to all distribution channels. Clients need to be told the cost of distribution through the Internet channel, the banking channel and the branch channel as well as the broker channel. In the meantime, we agree with the FSA that selecting just the broker channel is confusing and is not in the best interests of clients.
The Competition Authority was concerned that the commission system might lead brokers to offer clients not the lowest but the highest price available and thereby place their own interests ahead of those of their clients. That is a serious matter which needed to be addressed. We needed to ask whether brokers really give clients the best quotes possible on renewal. As stated earlier, the broker market is highly competitive and any broker simply selling at the price he thought he could get away with would not be able to do so. He would simply lose his clients to the thousands of other brokers waiting to pick up the business of those who are dissatisfied with the actions of brokers who behave in the wrong way. Apart from that, the IFSRA regulations state that a broker must give his clients the benefit of the best quote available or state the reasons for not doing so. We did not rely on what the market might do or on what the regulations require us to do, we carried out specific research to see what happens in practice. The results are contained in the packs circulated to Members. In the small number of cases where policies are not placed there, it is for good reason, it is in the client's interests and it is on foot of a decision by the client. The statistics to prove this are contained in slide 17.
We were also asked to consider the recommendations we might make for future regulation. We have made a number of recommendations to the IFSRA, which are detailed on the slides contained on pages 24 to 26, inclusive. I have already covered some of these and I will not delay matters by going through them again in detail. However, there are three matters to which I wish to refer.
I am aware that the committee is extremely interested in renewal terms being made available to commercial clients in good time before their renewal dates, as is now the case in respect of personal motor insurance. We strongly support having a requirement that insurers should make terms available early enough to allow customers to consider their options. Different time periods, such as, for example, eight weeks, for this have been discussed by the committee but we do not have a view on what would be an appropriate time period. We are strongly of the view this should be done.
