The FCA found that when combining all risk classes, the wholesale insurance broking sector doesn’t appear to be highly concentrated and there was no evidence of excessive profitability. It also found that although there are some barriers to entry and expansion for brokers within the market, which may adversely affect competition, these barriers are not large enough to lead to a significant restriction of competition.
The report also considered the future challenges to the insurance market, such as Brexit, but highlighted that its impact will need to be considered once the outcome of political negotiations become apparent.
The FCA suggest that there may be a reduction in competition in the London Insurance Market for EU business as some smaller insurance providers are finding that the potential additional burdens of no longer being a member state would exceed the advantages of having access to a wider market in the EU. This could lead to their withdrawal from the EU market when the UK leaves the EU. It considers that larger, more complex risks are unlikely to be affected by the withdrawal from the EU due to customer demand for London’s historical reputation and specialist skills.
The FCA speculates that the withdrawal of UK insurance providers from the EU market could lead to the emergence of a competing insurance marketplace in the EU. However, there is limited evidence to suggest that this will be the case.
What does this mean?
It may come as a surprise to many smaller/medium sized and younger brokers that the FCA has concluded that there is not a significant restriction of competition within the market. We have worked with SMEs and more innovative businesses who have struggled to establish themselves within the market. One common problem is the difficulties they face in accessing the Lloyds Insurance Market, as in most circumstances they will need to go through a larger, wholesale broker. The FCA recognised this barrier, suggesting that retail broker disintermediation was only plausible if the local broker and insurer have an existing relationship, and if the local broker was relatively sophisticated. The FCA also commented that some retail broker customers said that they were not authorised to broker directly into the London Insurance Market.
A consequence of this restriction is brokers having a significant amount of control over costs. Numerous concerns have been raised around the high level of capacity within Lloyds Syndicates, allowing the wholesale brokers to negotiate costs down by obtaining competing quotes from various syndicates.
It appears that Brexit is most likely to affect the smaller UK insurance providers, as regulatory barriers will present difficulties to accessing the EU market. In turn, member-state customers may be less likely to engage such a UK insurance provider, as the EU market will provide them with range of alternative options, which will be easier to access.
We have advised a number of SME insurance providers that don’t want to commit the time and resource in setting up a separate office within the EU on partnering with local authorised firms within EU member states. If this is an option which you would like to explore further, please get in touch.
