At the LMA’s recent event, highly experienced legal professionals explored critical questions regarding the remuneration of insurance intermediaries and highlighted points insurers should consider from a legal perspective when presented with such an arrangement (such as subscription market brokerage (SMB)).

Chris Paparella, a partner at Steptoe LLP, discussed a pivotal moment in the insurance sector – the Spitzer investigation of contingent commission payments in New York, which triggered a global chain of events that brought intense focus to broker fees.

Aidan Christie KC outlined the general legal position in the UK, emphasising that brokers are agents of the insured, with associated duties including the obligation to avoid conflicts of interest, to act in good faith, and refrain from acting for their own benefit or that of a third party without the informed consent of the principal (i.e., the insured). He also discussed several recent consumer cases which are considering duties related to secret or half-secret commissions. These demonstrate that the risk of failing to disclose commission could result in the payer of the commission being held liable as well as the agent. 

Lastly, Bill Batchelor, partner at Skadden, Arps, Slate, Meagher & Flom LLP, provided an antitrust/competition law compliance point of view in light of the perceived push towards facilitisation of business in Lloyd’s and the emergence of enhanced underwriting and broker facilities. He advised the audience to consider the following questions when entering into co-(re)insurance agreements:

Does the agreement impose commercial restrictions on the insurer, such as relinquishing pricing authority?

1. Are the parties to the agreement competitors?
2. Has an assessment been conducted to check if the arrangement complies with UK and/or EU competition law?
3. What sources of information/data are used in the facility (ie consider data sharing between competitors)?

Finally, the speakers endorsed the key questions that the LMA has suggested firms should consider when looking at an SMB arrangement:

1. Does making the payment put the insurer in a position where the broker might be influenced to place business with that insurer rather than another that might be more suitable for the insured?
2. Does the payment of a placement-related charge constitute outsourcing, and how would this align with regulation?
3. Are the services providing a genuine benefit to the insurer?
4. Are the charges commensurate with the benefit provided?
5. Can the benefit to the insurer be evidenced and audited?
6. If the broker has a significant share of the business line, will the underwriter still be shown business regardless of whether the underwriter pays?
7. Has the amount paid to the insurer been disclosed to the insured, and who has provided informed consent?

Is the amount being paid consistent with maintaining the fair value assessment of the product?