Opinion
robertson examines both sides of the debate over thecommission paid tomanaging agents for handling blockinsurance
Paul How much
commission is too much?
It Isnogreat secret that commission is paid to freeholders andmanaging agents in the flats insurancemarket. However,many firmsareshy of beingupfront about their earnings fromthis source. Allthatmay be be set to change
with theEuropeanCommission producingthe second versionof theInsuranceMediationDirective (IMD2) legislation. This is the replacementfor thecurrentIMD that provides aframework forthe minimumstandards of arranging andhandling insuranceinEurope. Consultation is nowunderway, with aviewtomakingitcompulsoryto disclose anycommissionearned in thesaleofgeneral insurance. Assuming that commission disclosure does formpart ofIMD2 –and this is lookingincreasingly likely-itwillstill be several yearsbeforethe legislationcomes into forceintheUK,althoughit would be prudent for firmsto start considering the issue now. Personally, I believe the payment
of insurancecommissions to professionalmanaging agents is justifiedwheretheyprovide arole inmanaging the insurance. Some firmsofmanaging agents estimate they spendupto25% of theirtime on insurance-relatedmatters so it would be unreasonable were they notremunerated forthis. The real questiontherefore,isnot so muchwhether or not commissions should be paid butsimplywhat is a fair level of remuneration andhow is this achieved and communicated?.
30 Flat ownersmay have a different
perspective. Afterall,Ihearyou say, howdifficult can it be to arrangeabuildingspolicyfor a block of flats in these days of online insurance? Surely youcan simply go to acomparisonwebsite and, in amatter of minutes, get the best possible pricefor theforthcoming year?Why should flat owners pay commissiontoamanagingagent forsuchasimpletask? The reality, however, is that the
task is notthatsimple. Thereisno such thing
aswww.comparetheflat
buildingsinsurancemarket.com Furthermore, even if such a service were to becomeavailableonline, thepoliciescurrently available in the market are so significantly different in termsofthe adequacy of coverand protectionthey provide, amanaging agent would be ill-advisedtorelyonprice alone in selecting a policy. Amanagingagent needstocarry
outdue diligencewhenselecting ablock insurancepolicy,making sure that notonlydoesitfulfil therequirementsofthe leasebut also that it does notcontain any unworkable termsand conditions or contain significantexclusions thatmayaffect flatowners. In addition, agents need to respond to flatowners’ enquiriesand are oftensignificantlyinvolvedin claims. Coupledwithall theother administrative andregulatory requirements (which involvetime andcost), then it is notunreasonable foraprofessionalfirmofmanaging agents to earn 20%commission; a
Have you ever asked thecheckout attendant howmuch thestore willmake by selling you a bag of potatoes?
figure of this level being considered totallyappropriate to covertheir costs. Ultimately,iftheyareunable to generate incomefromcommission, they will need to reflect this elsewhere in theirmanagement charges. Arguably themost controversial
elementofcommissionisthatitispaid to freehold property
investors.Many of thempurchase freeholds and include insurancecommissionearningsin their businessmodel. That said,many have significantportfoliosand, as such, claimthat their buying power enablesthemtoearncommissionat no pricedisadvantage to theflatowner. After all, is this any different to the buying powerofsupermarkets and independentretailers?Haveyou ever askedthe checkout attendanthow much thestore willmake by selling you a bag of potatoes? Potentiallythe biggest danger in the
commissiondebateisthatitcould lead to significantmarketpressure towards a “cheapest is best” mind-set, as opposedtoobtainingthe rightcover at
areasonableprice.Thisisnot simply scaremongering as thesetrendsare already clearlyevident inmanyother online
insurancemarkets.Arranging theright coverfor blocks of flats requires expert advice and can often be complex. If thenecessary expertise is lost in attempts to reduce costs, it is innocent flatownerswho will be the victims.●
Paulrobertson isManagingDirectorofMidwayInsurance Services Ltd&1st Sure Ltd
tel0845 3702848
emailpaul@midway.co.uk Webwww.midway.co.uk
Summer 2012 Flat Living
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