paul Robertson

examines both sides of the debate over the commission paid to managing agents for handling block insurance

It Is no great secret that commission is paid to freeholders and managing agents in the flats insurance market. However, many firms are shy of being upfront about their earnings from this source.

All that may be be set to change with the European Commission producing the second version of the Insurance Mediation Directive (IMD2) legislation. This is the replacement for the current IMD that provides a framework for the minimum standards of arranging and handling insurance in Europe. Consultation is now underway, with a view to making it compulsory to disclose any commission earned in the sale of general insurance. Assuming that commission disclosure does form part of IMD2 – and this is looking increasingly likely - it will still be several years before the legislation comes into force in the UK, although it would be prudent for firms to start considering the issue now.

Personally, I believe the payment of insurance commissions to professional managing agents is justified where they provide a role in managing the insurance. Some firms of managing agents estimate they spend up to 25% of their time on insurance-related matters so it would be unreasonable were they not remunerated for this. The real question therefore, is not so much whether or not commissions should be paid but simply what is a fair level of remuneration and how is this achieved and communicated?.

Flat owners may have a different perspective. After all, I hear you say, how difficult can it be to arrange a buildings policy for a block of flats in these days of online insurance? Surely you can simply go to a comparison website and, in a matter of minutes, get the best possible price for the forthcoming year? Why should flat owners pay commission to a managing agent for such a simple task?

The reality, however, is that the task is not that simple. There is no such thing as www.comparetheflat buildingsinsurancemarket.com Furthermore, even if such a service were to become available online, the policies currently available in the market are so significantly different in terms of the adequacy of cover and protection they provide, a managing agent would be ill-advised to rely on price alone in selecting a policy.

A managing agent needs to carry out due diligence when selecting a block insurance policy, making sure that not only does it fulfil the requirements of the lease but also that it does not contain any unworkable terms and conditions or contain significant exclusions that may affect flat owners. In addition, agents need to respond to flat owners’ enquiries and are often significantly involved in claims. Coupled with all the other administrative and regulatory requirements (which involve time and cost), then it is not unreasonable for a professional firm of managing agents to earn 20% commission; a

Have you ever asked the checkout attendant how much the store will make by selling you a bag of potatoes?

How much commission is too much?

figure of this level being considered totally appropriate to cover their costs. Ultimately, if they are unable to generate income from commission, they will need to reflect this elsewhere in their management charges.

Arguably the most controversial element of commission is that it is paid to freehold property investors. Many of them purchase freeholds and include insurance commission earnings in their business model. That said, many have significant portfolios and, as such, claim that their buying power enables them to earn commission at no price disadvantage to the flatowner. After all, is this any different to the buying power of supermarkets and independent retailers? Have you ever asked the checkout attendant how much the store will make by selling you a bag of potatoes?

Potentially the biggest danger in the commission debate is that it could lead to significant market pressure towards a “cheapest is best” mind-set, as opposed to obtaining the right cover at a reasonable price. This is not simply scaremongering as these trends are already clearly evident in many other online insurance markets. Arranging the right cover for blocks of flats requires expert advice and can often be complex. If the necessary expertise is lost in attempts to reduce costs, it is innocent flatowners who will be the victims. ●

Paul robertson

is Managing Director of Midway Insurance Services Ltd & 1st Sure Ltd tel 0845 3702848 email paul@midway.co.uk Web www.midway.co.uk