Insurance brokers under scrutiny
Insurance brokers shop around for deals for their customers but the size of their commissions is a mystery, even to the Insurance Council.
On one level, insurance is simple. You need coverage, you shop around, settle on a policy and pay the premium. You're covered.
Beneath the surface, many earthquake-hit Christchurch residents are finding out it is much more complicated than that.
Getting the type of cover you need is not always straightforward, which is where insurance brokers come in.
Many insurers are "direct" providers, meaning they do not deal with brokers. These include AMI, Tower, State and AA Insurance. Insurers that use brokers include Vero, NZI and Lumley.
Brokers do the research and shopping around for you, and take a cut for their troubles. How much they take, they don't have to say.
A broker's share comes from the premium. If you use their services, the figure you end up paying as a premium will not all go to your insurer. The broker takes commission out of that.
How much brokers get will usually be agreed in advance with the insurance company.
It ranges from about 15 to 25 per cent. They can go as low as 10 per cent, but in extreme cases can be more than 30 per cent.
Alternatively, a fee system, sometimes disclosed, can be used and is increasingly preferred on large, corporate accounts.
The Press learnt of the case of one Wellington businessman who, concerned at rising premiums, asked his broker for a cost breakdown and found he was paying 50 per cent.
"The only people that really know are the brokers themselves. That is the difficulty we have," Insurance Council chief executive Chris Ryan says.
"I, as head of the Insurance Council, cannot tell you what the commissions being paid in the industry are."
The council has pushed for compulsory disclosure of commissions in the past, without success.
The issue was before lawmakers in 2008 and 2010, but no change was forthcoming - a result Ryan describes as "very disappointing".
"We believe that customers should be able to see . . . the underwriting premium and . . . the commission being earned by the broker," he says. "Then they can compete on the cost to the insurer and the cost of commission."
Few would begrudge brokers their dues. Their expertise covers a complex industry.
Insurance Brokers Association of New Zealand chief executive Gary Young is for transparency but does not see the need for compulsory disclosure.
"What would tend to happen is people would say, 'I don't want to pay that fee', and go to direct insurers," he says.
"If that were to happen, then people would be buying insurance based on price without any advice as to what was best for them."
Instead, the association expects its members to divulge their commission if a client asks.
Major New Zealand broker Crombie Lockwood backs this. A spokesman said the company was happy to follow the association's lead.
However, Young's Australian counterpart, National Insurance Brokers Association of Australia chief executive Dallas Booth, disagrees.
For the past decade, Australian brokers have had to provide every new client with a "financial service guide", which sets how they will charge and, if they earn commission, how much they get.
"Has that changed the nature of purchasing decisions by clients of brokers? I would suggest not at all," Booth says.
Christchurch property developer Richard Peebles owned almost 70 commercial properties before the earthquakes.
He has no idea how much he pays his broker. "I've never asked, but I don't think they'd have a problem telling us."
Peebles would be concerned if his broker's commission was about the 30 per cent mark, but doubted it was.
"We've gone to the market and had the pricing done. I'm pretty happy really," he says.
Fellow developer Antony Gough confesses to having "never actually thought about" what he paid his broker.
However, he was surprised commissions were even in double figures.
"That's huge. I would have thought 2 or 3 per cent."
Christchurch has another factor in play.
As post-quake premiums soar, brokers working on commission will do very nicely, but Young dismisses the idea it is money for jam for brokers.
"What used to take a few hours to organise and place in the past now takes a few weeks [in Christchurch]," he says.
"I think you'd find the hourly rate has gone down rather than up."
Former commerce minister Lianne Dalziel presided over the Financial Advisers Act 2008 and its 2010 amendment, which regulates insurance brokers.
Disclosure of brokers' commissions was not considered, she says, because the focus then was on the new bad boys on the block, finance companies.
Long-term financial investments were classed category 1 under the act; most insurance instruments came under category 2.
Category 1 includes life insurance policies, but little else.
"We were really focused on upping the ante on those selling category 1 products where there is an element of risk," Dalziel says.
Insurers have since proven themselves just as vulnerable to rogue practices.
Western Pacific Insurance, which failed last year, had its policy book labelled "absurd" by its receivers.
The company's lack of reinsurance was made worse by its habit of aggressively chasing a market share, which included paying brokers up to 25 per cent commission.
Commerce Minister Craig Foss says the latest amendment to the 2008 act was fully implemented only in July last year and the Government is monitoring its progress.
Further intervention in the industry "must be appropriate and the imposition of further compliance costs on the wider financial sector must be fully justified," Foss says.
Officials will update him on the issue early next year, he told The Press.
Labour commerce spokesman Clayton Cosgrove supports compulsory disclosure, likening it to a real estate agent's obligations.
"If the industry is saying, 'If you ask, I'll tell', they should have no problem with being required to tell."
The current system presents a problem, he says.
"A person needs to be assured that the recommendation their broker is making to take A, B or C insurance policy is based on good sound advice that it will deliver the product they want, not necessarily around which insurance company's giving the best commission.
"And you'd have to argue that that could be a motivating factor."
The onus to find out costs should not rest with the customer, he says, especially in Christchurch, where policies are becoming more complicated than ever.
"Now I think people are far more aware of the complexities of insurance," he says.
"The advice one now expects from [brokers] is, 'Will this policy do what I want it to do?' I know of constituents who are now wanting a high degree of skill and knowledge about their insurance policy, especially commercially."