Glass reflection of surrounding buildings (2).

The FCA turns its attention to the wholesale insurance sector

Published on 13 November 2017

After indicating its intention to conduct a wholesale insurance market study in its 2017/18 Business Plan, the FCA has now announced the launch of its wholesale insurance broker market study and set out its terms of reference. This is an important development for brokers and insurers operating in this sector, and also for their clients.


As the title of the market study makes clear, the focus is on the role of brokers within the wholesale insurance sector.  The FCA will be assessing how effectively competition is currently working amongst brokers, how brokers influence competition in the underwriting sector, and whether competition could work better.  It has highlighted how "Brokers play an important part in the wholesale insurance sector ensuring clients get appropriate coverage at good value".  However, the FCA has also emphasised that this is not simply a question of lowest price, but includes a range of other important factors, such as breadth of coverage, an insurer's claims handling and its risk management services.

The FCA is taking a broad approach as to what constitutes wholesale insurance for these purposes. It is looking "to include risk business from overseas and the UK, placed by brokers with Lloyd's syndicates and insurance companies operating in the London Insurance Market". Such risks include:

    • Large, complex or speciality risk which usually require an element of bespoke pricing and coverage;
    • Portfolios of retail, SME and smaller corporate business placed in blocks on the London Insurance Market (e.g. Surplus Lines business from the US); and
    • Reinsurance- both treaty and facultative.

The FCA has acknowledged that the size of the wholesale insurance sector (the London Insurance Market accounted for more than £68 billion in gross written premium in 2015) and the nature of the risks covered mean that "the way it functions can have a wide-ranging impact on the broader economy".  Since the wholesale insurance broker sector was last reviewed a decade ago by its predecessor, the FSA, there have been numerous developments, including: the decline in premium rates whilst broker remuneration has increased; the evolution and growth in the volume of business being placed into alternative facilities (i.e. beyond the more traditional line slips and binding authority arrangements); and the increase in broker offerings in terms of additional, non-placement services (such as advisory, data and analysis services).

Main Areas of Focus

The FCA has highlighted three main areas of focus for the market study:

    1. Market Power: the FCA will consider whether individual broker firms have market power, and, if they do, what effect this has on competition. Various concerns have been expressed by stakeholders in relation to practices which may be the result of market power being exercised by brokers.  As part of its analysis, the FCA will look at evidence of any sub-segments within wholesale insurance and levels of competition within them.  It will also be assessing the extent to which broker firms can enter the market and/or expand their business.

    2. Conflicts of Interest: there are concerns that brokers may be placing business within facilities due to these attracting greater remuneration rather than being in the clients' best interest. The FCA is planning to explore the existence of "pay-to-play" arrangements and the extent to which brokers are more likely to place business with underwriters who purchase additional services from them. Other areas of interest for the FCA include the tying of reinsurance (where brokers insist that any reinsurance is placed with them) and the role of broker-owned Managing General Agents.

    3. Broker Conduct: the FCA is proposing to examine the prevalence of placing business within facilities rather than the open market and whether this excludes some insurers.  In addition, the FCA has raised the subject of tacit co-ordination and will look at how the sector operates in practice and whether indirect information-sharing could potentially enable brokers to "reach a coordinated outcome".

The Decision to Launch the Market Study under FSMA Powers

The FCA has decided to use its FSMA, rather than its Enterprise Act, powers to launch its market study.  Consequently, the FCA is not bound by a statutory twelve-month deadline for concluding the market study; nor does it have to decide whether to make a Market Investigation Reference within six months of the market study's launch.  It has said that it will aim to publish an interim report in the Autumn of 2018 setting out its analysis, preliminary conclusions and any potential solutions to concerns identified. 

Possible Outcomes of the Market Study

A market study can result in a sector being given a clean bill of health.  However, if the FCA were to conclude ultimately that the wholesale insurance broker market is not working well, it has a wide range of options at its disposal, including:

    • changes to the rules regulating brokers;
    • publishing general guidance;
    • proposing enhanced industry self-regulation;
    • imposing firm-specific remedies;
    • making a Market Investigation Reference to the CMA; and
    • taking no further action as any regulatory intervention would not be proportional to the issues identified or these issues are likely to be remedied by upcoming legislative developments, such as          the Insurance Distribution Directive.

In addition, if the FCA were to uncover anti-competitive behaviour as part of its investigation into how the market is working generally, it could then liaise with the CMA about commencing competition investigations into individual firms.

Next Steps

The FCA is informally seeking feedback and views by 19 January 2018 on the terms of reference and the questions raised.  It will soon begin its formal information-gathering exercise. It will be looking to obtain data and information from brokers, insurers and their customers. The FCA is proposing to hear stakeholders' views through individual meetings as well as holding a roundtable event and conducting market research with purchasers.  This will be a busy time for the sector.