Distribution Channels in
Insurance
December 2013
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Contents
1
Executive Summary....................................................................................................................................................... 1
2
Descriptive Analysis of Distribution ......................................................................................................................... 4
3
4
5
2.1
Introduction ........................................................................................................................................................... 4
2.2
France ...................................................................................................................................................................... 5
2.3
Germany ................................................................................................................................................................. 9
2.4
Italy ......................................................................................................................................................................... 10
2.5
Netherlands.......................................................................................................................................................... 14
2.6
United Kingdom .................................................................................................................................................. 17
2.7
Spain ....................................................................................................................................................................... 22
2.8
Cross-country Comparisons............................................................................................................................ 25
2.9
Conclusions: The State of Distribution ......................................................................................................... 30
The Drivers of Channel Choice .............................................................................................................................. 31
3.1
Introduction ......................................................................................................................................................... 31
3.2
The Economic Contribution of Different Distribution Models: Theory ............................................... 31
3.3
The Economic Contribution of Different Distribution Models: Evidence ............................................ 34
3.4
Conclusions: Drivers of Channel Choice ..................................................................................................... 38
Trends in Distribution Choice ................................................................................................................................. 39
4.1
Price Aggregators ............................................................................................................................................... 39
4.2
Incentivisation and Governance of Intermediaries ..................................................................................... 46
4.3
Multi-Channel Strategies ................................................................................................................................... 51
4.4
Conclusions: Trends in Distribution Choice................................................................................................ 53
Regulatory Overview and Prospective Change ................................................................................................... 54
5.1
Introduction ......................................................................................................................................................... 54
5.2
Regulatory Overview ......................................................................................................................................... 54
5.3
Scope of Regulation ............................................................................................................................................ 56
5.4
Regulatory Change ............................................................................................................................................. 61
5.5
IMD2 ...................................................................................................................................................................... 61
5.6
Our Expectations of IMD2’s Impact on Distribution Channel Choice .................................................. 63
5.7
National Regulatory Initiatives ......................................................................................................................... 65
5.8
How Will Regulation Impact on Distribution in the Future? ................................................................... 66
5.9
Conclusions: Regulatory Change and the Make-up of Distribution ....................................................... 67
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1 Executive Summary
L’Associazione Nazionale fra le Imprese Assicuratrici (ANIA) wishes to understand the models of insurance
distribution in France, Germany, Italy, the Netherlands, Spain and the United Kingdom. Europe Economics
has analysed the different distribution models, and the key drivers underpinning the choices of model made
by both consumers and insurers.
Our work considers commonalities and differences across these countries, and also how these vary across
different product lines (life, motor and other non-life insurance products) and different market segments
(i.e. commercial and retail). We also consider how and where distribution models are changing, and the
potential role that regulatory changes may have on the evolution of distribution in insurance. In this study
we set out the following:
 A descriptive analysis of insurance distribution in France, Germany, Italy, the Netherlands, Spain and the
United Kingdom (Section 2), identifying how channel choice has operated in each of these markets.
 An analysis of the theory and evidence around the economic drivers and incentives of channel choice
(Section 3).
 We then discuss how distribution is evolving — with particular reference to price aggregators, multichannel strategies and the governance relationships between insurers and intermediaries — and how
these are evolving (Section 4).
 In Section 5 we provide an overview of the current regulatory framework and we also discuss future
regulatory developments, specifically IMD2, with specific reference to how these might impact upon the
distribution channel mix.
We set out below our key findings.
Distribution models and emerging trends
Regulatory change and technological
innovation have facilitated the
emergence of more diverse
distribution models.
Over the past twenty years traditional intermediaries in the insurance
market have faced challenging conditions as liberalisation and
innovation have altered the competitive landscape. The agency
channel has lost significance — at least in part — in most European
markets (the Italian non-life segment is a notable exception to this
general trend). The broker channel has been stable or has typically
lost share, particularly in non-life (the Dutch life market is an
exception to this). However, there has been some cannibalisation
here — notably in the UK and the Netherlands — where aggregator
sites have gained at the expense of (smaller) traditional brokers.
The direct channel has experienced notable declines in France, Italy
and Spain — this is largely due to a switching from bricks & mortar
direct routes in life insurance to banks and bancassurance. Indeed
bancassurance (or at least the use of banks as a distribution channel
even where the bank is structurally separate from the insurer) has
been a major trend in itself. Gains in the direct channel in the UK
and Dutch non-life markets, on the other hand, highlight the growth
of remote direct selling, initially by phone and then through the
internet.
Where change has occurred its main drivers have been technological
innovation and regulation. For example the growth of banks as an
important distribution channel in the life segment — particularly
evident in France, Italy and Spain — was driven by liberalising
legislation in the context of markets lacking an effective alternative.
Similarly the gain — particularly in the UK and Netherlands in non-life
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The emergence of price aggregators
has substituted some of the
functions traditionally offered by
smaller intermediaries. This is
strongest — but not limited to — in
the UK and Dutch mainstream nonlife arena.
A growing polarisation between
quality and price and increasing
regulatory uncertainty is
encouraging more insurers to adopt
multi-channel strategies.
products — due to the growth in remote direct selling, first by phone
and latterly on-line and the emergence of aggregators can be seen in
this light. These factors — innovation and regulatory change — are
likely to remain important in the future.
Price comparison websites reduce search costs for most consumers
and hence reduce the value of those distribution channels that focus
upon performing this economic function. This means that brokers,
where they exist, can more easily be substituted, especially the
smaller players or those that do not offer high-quality advice.
Aggregators have enabled self-directed consumers to fulfil more
processes independently. This is driving greater polarisation between
a price focus (and the associated cost leadership strategies of
insurers) and a quality focus. This is clearest when comparing more
standardised products (such as motor) with more complex ones, but
is not restricted to the former. Such polarisation can also be found
within a single firm, with brands targeting price- or quality-conscious
groups discretely.
These trends appear most strong in the Dutch and UK markets
(particularly in non-life product areas, such as motor insurance).
They are much weaker in France, Italy and Spain, whilst Germany’s
market falls somewhat in between.
Multi-channel strategies whereby the insurer sells a product through
various distribution channels simultaneously are becoming more
common, and are no longer the domain of the largest insurers. The
economic rationale includes both a desire amongst insurers to
mitigate uncertainty (e.g. difficulties in forecasting the profitability of
traditional and newly emerging channels, regulatory risk, changes in
the business landscape) and segmentation of the market due to
differing consumer groups shopping in divergent ways (see Table 3.1
in Section 3).
Interaction with regulatory change
Significant regulatory change is
scheduled for the insurance sector.
This is likely to be disruptive in
distribution, and consumers may seek
to rely less on intermediaries as a
result.
Intermediary remuneration structures
will simplify.
The market- and technology-driven trends described in this study
interact with a changing regulatory environment. Indeed, there are
a number of national and EC-level regulatory changes that we
expect to impact upon distribution channel choice.
The UK and the Netherlands are moving away from the third
party remuneration of advisers, at least for complex products.
The well-established independent intermediary channel in these
countries has already undertaken voluntary moves towards more
fee-based models. Those independent intermediaries who offer a
range of products (i.e. including those where regulation is not
changing) are striving to transition clients towards a fee-based
approach in all product areas. The rationale here is that a mixed
economy approach, with fees here but reliance on commissions
there, would confuse — even concern — customers.
The draft IMD2’s mandatory disclosure requirements may mean
consumers seek to rely less on intermediary channels — this
would apply equally to brokers and agents.
The difficulties of fully explaining incentive structures, if required,
may encourage simpler remuneration bases to avoid deterring
customers (this may be particularly true in the case of certain
forms of “hard” incentive, such as holidays). This may reduce the
alignment of incentives (assuming that the current schemes are
well-designed) between insurers and intermediaries. A further
consequence is that any residual telephone-based selling may
become more difficult: discussing a complex remuneration
structure on the telephone is a different proposition for a
consumer than being able to see that structure in text (whether
on-screen or on a piece of paper). At the least, structures are
likely to simplify.
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Where brokers are already important,
a consolidation towards larger
brokerages is likely. In those markets
where brokers and price aggregators
have little presence — i.e. retail
markets in France, Italy and Spain —
these regulatory changes are likely to
limit the further development of both
brokers and price aggregators.
In those markets where agency is predominant — such as non-life
in France, Germany, Italy and Spain —there is likely in our opinion
to be a two-fold effect: first, some restructuring of the
remuneration and governance structures between the insurer and
the agent, and second an increase in the appeal for a marketdisrupting move for an insurer focused upon internet-based direct
sales. Whilst the latter is potentially inhibited by the apparent
preference in these markets for face-to-face contact, this may be
tested in the future.
There may also be significant resistance from customers to feepaying. Recent research found that nearly one-third of
participants responded in a way consistent with them being highly
reluctant to pay up-front for advice. Therefore a requirement for
independent insurance intermediaries selling investment products
to transition from remuneration from third parties to
downstream payment makes it likely that some advisers will cease
to be (or at least self-describe) as independent, with direct or
agency sales by insurers (notwithstanding any disclosure
requirements) and distribution through banks being the likeliest
beneficiaries.
Again a switch to a fee-basis is widely expected to result in
marked consolidation of the remaining brokerages, resulting in
larger intermediaries. Whilst size does not automatically equate
to improved quality it should allow increased specialisation in
particular product areas. Currently independent intermediaries
may therefore be hit by both (a) price aggregators cannibalising
customers and replacing part of their economic value (search),
and (b) regulatory action against existing third party, variable
remuneration models. Only the best quality advice givers will
prosper in such an environment. In those markets where brokers
and price aggregators have little presence — i.e. retail markets in
France, Italy and Spain — these changes are likely to inhibit the
further development of both brokers and price aggregators.
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2 Descriptive Analysis of Distribution
2.1 Introduction
This section provides a descriptive analysis of the models of insurance distribution in France, Germany,
Italy, the Netherlands, Spain and the United Kingdom (UK). For each country we describe: (i) the different
types of insurance intermediaries operating and their numbers; (ii) the evolution of the distribution
channels for separate segments and the reasons for the prevalence of certain channels within particular
product segments; and (iii) synoptic tables to facilitate cross-country comparison.
The section is organised as follows:
 Definition of different insurance distribution types.
 The evolution of distribution channels by country.
 Cross-country comparisons.
More generally a degree of inertia in channel choice exists such that the historic starting conditions (e.g.
whether the intermediary market is traditionally dominated by agency as opposed to brokerage) is an
important cause of the observed cross-country differences in distribution channel mix. Typically change has
been prompted by regulatory or technological innovations: we discuss these factors where relevant within
the country-specific profiles below.
2.1.1 Typologies and definition of different distribution channels
We set out below the definitions which we have adopted in this study of the main different distribution
channels. We stress that these definitions abstract from the legal definitions of any particular jurisdiction;
instead they draw primarily upon the economic common functions involved.
 Direct — this is where sales are made directly by the insurer who has a direct link with the final
customer and does not make use of third parties to facilitate the transaction. Direct sales can take
different forms: face-to-face and remote (internet and other forms of direct selling, e.g. telephone, mail).
 Bancassurance — this refers to the distribution of insurance products through bank branches.1 This can
include purely distributional relationships as well as where there is common ownership.
 Brokers — these are intermediaries independent of the insurers and typically have access to the whole
market, or a wide selection of it.
 Agents — these are intermediaries linked to one or more insurer on behalf of which they distribute
products. A distinction can be made between single-tied agents (agents that sell products exclusively
from one provider) and multi-tied agents (which have agreements with more than one insurer, yet fall
shy of full market coverage).
 Price aggregators — a price aggregator, or price comparator, is an internet platform where insurance
products from different suppliers are listed and compared (primarily in terms of price). From an
economic viewpoint this can be considered as a form of intermediated sale because a comparator
website acts as a third party who facilitates transactions. Aggregators have emerged relatively recently
1
The term bancassurance can also have a broader meaning, and “at present it is used to describe all kinds of relationship
between the banking and the insurance industries” (Fiordelisi, F. and O. Ricci (2006), Bancassurance efficiency gains in
the insurance industry: the Italian case, University of Rome III).
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and their impact to date varies significantly by market remains varied. We describe these in more depth
in Section 4.
2.1.2 Limitations on the empirical analysis
We have sought evidence on the importance of the above types of intermediary channel in the distribution
of insurance in each of the countries of interest to this study. There are a number of limitations here. As
we have noted above the local definitions of different channel types can be country-specific: we have striven
to conform these to our standard definitions in the analysis below. In order to aid transparency we have
set out the number of registered parties both by national legal definition and also showing how these have
been consolidated within our generic “economic” interpretations of these definitions.
A further complication is around the comparative status of the intermediaries in different countries. One
country may require the registration of all intermediaries in the distribution chain, whilst others will not. In
the tables below we present a broad interpretation whereby all registrants are included. When we present
cross-country comparison, at the en d of this chapter, we use this and also a narrower interpretation of the
intermediaries. The latter by and large are those with direct relationships with both insurers and the local
supervisor. For instance, sub-agents and collaborators in Italy are excluded from our narrow
interpretation.
Equally insurance is not a homogeneous sector. A number of possible sub-divisions can be made between:
 Commercial versus retail insurance
 Life versus non-life insurance
 Various products within non-life including motor insurance (typically the largest single segment) and
other forms such as home insurance, travel insurance and so on
 Various types within life insurance, including traditional term products and investment products with a
life insurance wrapper.
The primary limitation here has been the availability of data: typically there is little reporting beyond life,
non-life and the motor segment (and not always this). To aid comparability we have largely restricted our
analysis to these categories.
Similarly we do not have the data to analyse directly the evolving role of cross-border in insurance. We
have shown in our 2009 study on retail insurance that cross-border trade in retail insurance is very
limited.2 For example, across the EU just 0.6 per cent of motor insurance was written on a free provision
of service (FPS) basis. FPS was more important in property, largely due to the writing of commercial
property insurance on this basis. Such incoming trade was least important in the major markets and we do
not believe that the absence of such an analysis is significant.
2.2 France
2.2.1 Market shares by channel
Below we provide some descriptive information, facts and charts with the objective of illustrating the
changes in distribution channels over time and of presenting the current state of play.
2
Europe
Economics
(2009),
“Retail
Insurance
Market
http://ec.europa.eu/internal_market/insurance/docs/motor/20100302rim_en.pdf.
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Study”,
downloadable
at
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Figure 2.1: Market Shares per Distribution Channel in France, 2009
Life Insurance
Non-life Insurance
2%
3% 7%
16%
2%
10%
Agents
14%
Brokers
18%
Banks
68%
60%
Direct (face
to face)
Direct
(other)
Source: FFSA
We first consider life.
Figure 2.2: Evolution of Distribution Channels in France (Life)
70%
60%
50%
Brokers
40%
Agents
Banks
30%
Direct (face-to-face)
20%
Direct (other)
10%
0%
Source: EE compilation from FFSA reports
The mix of distribution channels has remained relatively stable in the last ten to fifteen years. A very
significant change was previously experienced in the life segment when bancassurance increased its share
from 39 per cent in 1990 to 60 per cent in 1997 (and the proportion was just 25 per cent in 1985). This
increase in the banks’ market share came mainly at the expense of agents and direct sellers. The
prevalence of bancassurance has since stabilized.
Several reasons have been accredited for the success of bancassurance:
 Informational advantages — compared to other distribution channels, banks have a key informational
advantage: they have readier access to high quality information about their clients, or potential clients:

First, banks can have closer ties with their clients thanks to their extensive branch networks and
customer interactions are very frequent (e.g. consumers use banking services almost on a daily
basis). Whilst on-line banking may challenge this in the future, at present it has made only very
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limited inroads into the French market (and was naturally unimportant in the late 1980s and 1990s
when bancassurance was growing quickly).

Second, banks are well-sited to be the first to meet clients in their purchasing cycle for investment
products and therefore can be proactive in proposing products based on the clients financial
situation and investments needs. This informational advantage allowed banks to exploit market
niches that were traditionally neglected.
 Trust — banks were considered to have a better professional image than insurance companies (at least
in France).
 Costs — banks were able to lower management costs related to distribution activities significantly. For
instance by 1996 the management costs (as a percentage of overall distribution costs) were 4.0 per cent
for banks as opposed to 10.9 per cent, 9.6 per cent, 10.0 per cent, for tied agents, brokers, direct (faceto-face) selling respectively. Such cost savings were achieved through a combination of strategies:

Extensive use of customer databases to target specific client bases.

Shifting some administrative costs to clients (e.g. by providing the possibility to manage insurance
products via telephone or internet).

Careful selection of insurance partners based on cost considerations.
 Institutional and regulatory environment — in the mid-80s a significant privatization of the banking
sector took place creating new banking entities with a significant appetite for profit, and life insurance
was seen as an ideal area to expand into. First, the life insurance segment in France is historically large
due to tax incentives that encouraged people to save into life insurance-related products. Second,
market niches existed which had been underexploited by insurance companies (more detail is provided
below).
Figure 2.3: Evolution of Distribution Channels in France (Non-Life)
80%
70%
60%
50%
Brokers
Agents
40%
Banks
30%
Direct (face-to-face)
20%
Direct (other)
10%
0%
Source: EE compilation from FFSA reports
The non-life segment in France has been traditionally dominated by agents, and still is. Agents in France
tend to have exclusive ties with a single insurance company and have exclusive rights to that company’s
products in their geographical area. As Figure 2.3 indicates, agents accounted for more than 75 per cent of
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gross premiums sold in 1990 and still account for close to 70 per cent.
due to the following key comparative strengths:
The prevalence of tied agents is
 Widespread geographical presence. Agents are present virtually everywhere in France. Moreover,
given their exclusive ties with the supplier they can be particularly attractive to insurers as they allow
them to access the agents’ competitive advantages in local markets.
 Closeness to the customer base. Agents tend to be well-known figures in their local communities and
can have strong social ties with the local population. This is claimed to provide them with a
comparative advantage in understanding clients’ needs and tastes.
 Technical expertise. Agents in France are highly regarded for their competence and technical
knowledge of various insurance products. They are therefore able to add value to the sales chain by
providing expert advice to their clients.
Though small in number compared to agents, brokers in the non-life segment have accounted for around
20 per cent of premiums sold since 1990. Unlike agents, brokers tend to cluster in and around
metropolitan areas. This reflects the fact that the brokers’ key comparative advantage is in commercial
insurance and metropolitan areas are where corporate customers are more likely to be.
The banks have steadily increased their shares also in the non-life segment: from close to zero in 1990 the
market share is now 10 per cent. The advantages held by bancassurance in the life sector carry less weight
in non-life: in particular, whereas life insurance — certainly where it overlaps with investment products —
can be perceived by consumers as within the banks’ core competence, this does not hold in non-life.
2.2.2 Registered intermediaries
L'Organisme pour le Registre des Intermédiaires en Assurance (ORIAS) is responsible for managing the
register of intermediaries in France. The categories it uses are:
 Insurance and reinsurance brokers
 General insurance agents — these are persons holding a general insurance agent authorisation
 Insurance agents — these are intermediaries other than general insurance agents
 Insurance intermediary agents — these are intermediaries holding an authorisation registered in one of
three aforementioned categories, and may be linked to more than one insurer
 Bancassurance intermediaries — these may be registered as either brokers or agents.
Credit Mutuelles fall under the status of agents. Direct sellers of insurance do not need to register. We
present below the number of registration per category.
Table 2.1: Intermediaries registered with ORIAS in France, 2011
Legal
entities
Physical
persons
Total
Brokers
General insurance agents
Insurance agents and insurance representatives
11,524
575
9,874
9,151
11,567
9,310
20,675
12,142
19,184
Credit Mutuelles
Bearing a broker registration
Bearing an agent registration
European intermediaries (excluded from the analysis below)
2,016
1,450
6,385
-
2,016
1,450
6,385
31,824
30,028
61,852
LEGAL DEFINITION
Total registrations
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ECONOMIC INTERPRETATION
Agents
(General insurance agents, Insurance representatives , Insurance agents, local
funds bearing a registration in the Insurance Representative category)
11,899
20,877
32,776
Brokers
(Insurance or Reinsurance Brokers, local funds bearing a registration in the
Broker category)
13,540
9,151
22,691
Total registrations
25,439
30,028
55,467
Source: ORIAS Annual Report 2011, Europe Economics
2.3 Germany
2.3.1 Market shares by channel
We present the general market shares per distribution channel in the figure below.
Figure 2.4: Market Shares per Distribution Channel in Germany, 2011
Life Insurance
3%
Non-life Insurance
5%
2%
23%
24%
7%
5%
30%
Brokers
Agents
Banks
Direct
48.3%
Other
53%
Over 90 per cent of sales in the German life and non-life retail insurance markets rely on intermediaries
(including bancassurance) — direct writers represent a minor share of the market (e.g. three per cent of
life — although in motor it is as high as 10 per cent). Tied and multi-tied agents remain the most important
channel in both life and non-life. Their dominance is considered to have declined over the past few decades
(i.e. since the liberalisation of the market in the 1990s). Indeed single-tied agents alone accounted for an
estimated 80 per cent of market share in 1985. This decline was particularly marked in life.
Brokers have gained, particularly in non-life. Bancassurance held a negligible segment of the life and non-life
retail market in 1985 (just two per cent in the life market in that year).3 Although it has since grown the
role of bancassurance remains limited in Germany — a 25 per cent penetration in life insurance —
compared to its role in other mainland European states. This is related to the large number — and
importance — of small and regional banks, which hinders the economies of scale required for effective
distribution of standardised products.4
3
4
Swiss Re, sigma No 5/2007.
DG Internal Market and Services (2011), Study on the impact of the revision of the Insurance Mediation Directive
(ETD/2007/IM/B2/51) – Final Report.
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In commercial insurance, the role of tied agents is insignificant, except in relation to small business clients.5
2.3.2 Registered intermediaries
The German market recognises a number of different forms of intermediary:
 Tied agents — these are registered by insurance companies.
 Agents with authorisation — these are tied agents representing one or multiple insurance companies
licensed by the competent German Chamber of Industry and Commerce (IHK). The insurer or insurers
they are tied to are unlimitedly liable for their agents but the agents are not employees.
 Brokers — these are not affiliated with any insurer, i.e. they are agents.
 Product accessory intermediaries — these are traders where insurance mediation is not their principal
activity. They can act as either agents or brokers (e.g. travel agencies offering travel insurance may do
so for one or many insurers).
 Advisers — these provide professional insurance advice without receiving remuneration from an
insurance company, i.e. they are only remunerated on the basis of fees paid by their clients, thus being
fully independent from insurers
 Bancassurance — banks may operate as either agents or brokers.
In the table below we report the number of registrations per intermediary category.
Table 2.2: Intermediaries registered in Germany, 2011
LEGAL DEFINITION
Total
Tied insurance intermediaries
175,773
Insurance agents with authorization
33,083
Insurance brokers
45,641
Product accessory intermediaries
3,075
Insurance advisers
223
Total registrations
257,795
ECONOMIC INTERPRETATION
Agents
(Tied insurance intermediaries, insurance agents with authorization, product accessory
intermediaries)
Brokers
(Insurance brokers, insurance advisers)
211,931
45,864
Total registrations
257,795
Source: Statistical Yearbooks of German Insurance 2012, Gesamtverband der Deutschen Versicherungswirtschaft e.V., Europe Economics
2.4 Italy
2.4.1 Market shares by channel
Below we present market shares by sub-market.
5
European Commission (2007), Sector Inquiry under Article 17 of Regulation (EC) No 1/2003 on business
insurance (Final Report).
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Figure 2.5: Market Shares per Distribution Channel in Italy, 2010
Life Insurance
Motor Insurance
Non-life Insurance (excl. motor)
1%
7%
15%
3%
7%
6%
1%
6%
Agents
14%
Brokers
Banks
75%
76%
Direct
89%
Source: ANIA
The figures below illustrate the evolution of distribution channels in Italy for the life segment (the data
covers the period 1991-2010), and the motor and non-motor segments (for the period 1999-2010).
Figure 2.6: Evolution of Distribution Channels in Italy (Life)
90%
80%
70%
60%
Brokers
50%
Agents
40%
Banks
30%
Direct
20%
10%
0%
Source: EE compilation from ANIA reports
Distribution in the life segment has experienced significant change. The last 20 years have witnessed a
remarkable increase in the prevalence of banks, primarily at the expense of agents and (to a lesser extent)
direct sales. Bancassurance accounted for approximately 15 per cent of life premiums written in 1991, and
it currently accounts for more than 75 per cent.6 This was driven by:
 The institutional and regulatory environment. As in France, the process of financial deregulation and
integration between the banking and insurance sectors which took place in Italy in the mid-nineties is
largely responsible for the emergence of bancassurance in the life segment. Joint control was an
6
In Figure 2.6 the category “Banks” includes also sales made by financial advisors and postal offices.
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important driver here: as of 1995 20 banks had control of over 35 insurance companies, and 62 had
minority participations.7
 Cross-selling. The nineties also witnessed the spread of investment funds which were typically sold
together with insurance products. Banks had a clear advantage in distributing these products because of
their ability to act proactively based on a “ready-made” understanding of clients’ overall financial
situation and investments needs.
Figure 2.7: Evolution of Distribution Channels in Italy (Motor)
100%
90%
80%
70%
60%
Brokers
50%
Agents
40%
Banks
30%
Direct
20%
10%
0%
Source: EE compilation from ANIA reports
7
Ventura, L., “The Italian Insurance Sector between Macro and Micro Facts: Salient Features, Recent Trends, and an
Econometric Analysis”, Chapter 7, Handbook of International Insurance, between Global Dynamics and Local
Contingencies, Springer (2007)
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Figure 2.8: Evolution of Distribution Channels in Italy (Non-Life excluding Motor)
90%
80%
70%
60%
Brokers
50%
Agents
40%
Banks
30%
Direct
20%
10%
0%
Source: EE compilation from ANIA reports
There has been marked stability in the distribution of non-life insurance (motor and non-motor segments).
The prevalence of agents in both has decreased slightly in the last decade (from approximately 95 to 90 per
cent in the motor segment, and from around 80 to 75 per cent in non-motor), yet agents remain by far the
dominant distribution model.8
Agents in Italy are traditionally single-tied, and in an attempt to increase competition exclusive agency
relationships were banned in the non-life segment in January 2007.9 However there are as yet no significant
changes in the mix of distribution channels since then.10
The most frequently cited reason for the success of agents is their widespread geographical presence (i.e.
as was the case in France). Below we list the most important advantages of this channel:
 Technical knowledge. Over the last 20 years consumers’ sophistication has increased, meaning that the
professional skills and knowledge of the sale force has become a key attribute to deal effectively with an
increasingly demanding customer base. Agents receive regular training and support and should
therefore be capable of providing professional advice to assist consumers in their purchasing decisions.
 Alignment of incentives with insurance company policy. Insurers have succeeded in developing a close
relationship with their agents in order to ensure that they operate consistently with their insurer’s
overall policy. This goal has been achieved through:

8
9
10
Training, updating on products, and provision of various assistance and support (e.g. PC’s, software,
advertising material).
The trend in the non-life segment as a whole was in the opposite direction in the preceding years: agents
accounted for 77 per cent of all non-life premiums underwritten in 1991 and for 86.1 per cent in 2001. (Source:
Ventura, L., “The Italian Insurance Sector between Macro and Micro Facts: Salient Features, Recent Trends, and an
Econometric Analysis”, Chapter 7, Handbook of International Insurance, between Global Dynamics and Local
Contingencies, Springer (2007).
We make a distinction here between exclusive agency (where an explicit agreement forbids an intermediary from
distributing products of a competing insurer) and single-tied agency, i.e. a situation where an agent is not forbidden
from distributing product from multiple suppliers, but decide not to do so.
Indeed an econometric analysis (see Perego, J.(2010), “Il divieto di “exclusive agency” in Italia”, IBL Special Report)
suggests that the law implemented in 2007 in Italy has not had much impact.
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
An emphasis on knowledge transfer and professional development. One way of achieving this, for
example, is to adopt a multi-channel approach which allows exploiting knowledge transfers between
different sales professional figures (employees, agents, financial advisors, etc.)

The development of appropriate remuneration and incentive schemes.
 Loyalty. The initiatives illustrated above (i.e. regular training and support and the implementation of
effective incentive schemes) contribute to the creation of an extremely loyal agency network.
2.4.2 Registered intermediaries
As in Germany, agents dominate in Italy. Below we report the number of registered intermediaries.
Table 2.3: Intermediaries Registered in Italy in 2010
Legal
entities
Physical
persons
Agents
Brokers
27,573
9,816
3,477
1,285
Direct writers
Banks and financial advisers
13,976
-
Sub-agents and collaborators
European intermediaries (excluded from economic analysis)
Total registrations
LEGAL DEFINITION
Total
37,389
4,762
699
13,976
699
176,631
13,046
7,230
189,677
7,230
221,657
32,076
253,733
13,976
-
13,976
204,204
22,862
227,066
3,477
1,285
4,762
699
699
24,846
246,503
ECONOMIC INTERPRETATION
Direct writers
Agents (incl. sub-agents and collaborators)
Brokers
Banks and financial advisers
Total registrations
221,657
Source: ISVAP Annual Report 2010; additional 7,230 subjects with residence or legal site in another Member State of the EEA.
In the above table we present our broad interpretation, with all registrants included. A narrower
interpretation of the intermediaries, i.e. including those with direct relationships with both insurers and the
local supervisor, would exclude sub-agents and collaborators. We revisit this difference when we compare
the comparative density of intermediaries, e.g. at Table 2.8 below.
2.5 Netherlands
2.5.1 Market shares by channel
Below we present market shares by sub-market. Distribution data from the VvV only distinguishes
between direct and intermediated sales. The intermediaries’ category includes agents and brokers.
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Figure 2.9: Market Shares per Distribution Channel in the Netherlands, 2009
Life Insurance
Motor Insurance
Non-life Insurance (excl. motor)
0%
2%
30%
29%
28%
36%
Intermediaries
Direct
69%
Other
70%
35%
Source: VvV
Figure 2.10: Evolution of Distribution Channels in the Netherlands (Life)
80%
70%
60%
50%
Intermediaries
40%
Direct
30%
Other
20%
10%
0%
Source: EE compilation from VvV reports
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Figure 2.11: Evolution of Distribution Channels in the Netherlands (Motor)
90%
80%
70%
60%
50%
Intermediaries
40%
Direct
Other
30%
20%
10%
0%
Source: EE compilation from VvV reports
Figure 2.12: Evolution of Distribution Channels in the Netherlands (Non-Motor)
70%
60%
50%
40%
Intermediaries
Direct
30%
Other
20%
10%
0%
Source: EE’ compilation from VvV reports
There is a strong similarity between the distribution of life and motor insurance products: in both segments
intermediated sales predominate (accounting for between 70 and 80 per cent of premiums written).
In other non-life (i.e. non-motor) products the distribution mix between indirect and direct sales was
respectively 60 and 40 per cent in 2002. The apparent spike in direct sales was driven in large part by the
privatisation of the Dutch healthcare system, subsequent to which the sale of health insurance was largely
recorded as being direct. Sales made through other channels (such as through employers) were recorded
as separate category only from 2008.
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2.5.2 Registered intermediaries
The following types of intermediaries are present in the Dutch market:
 Agents
 Brokers
 Direct sellers
 Banks — these act as an intermediary instead of selling their own products. They can operate as agents
or brokers.
Table 2.4: Intermediaries Registered in the Netherlands, 2011
LEGAL DEFINITION and ECONOMIC
INTERPRETATION
Total
Direct sellers
Agents
5,235
948
Brokers
Other
5,212
3,317
Total
14,712
Source: Financieel jaarverslag verzekeringsbranche 2011, Verbond van Verzekeraars, BIPAR, CEA, Europe Economics
2.6 United Kingdom
2.6.1 Market shares by channel
Distribution data from the Association of British Insurers (ABI) are available only for the non-life segment.
Below we present market shares, first per market segment, then for non-life:
Figure 2.13: Market Shares per Segment in the UK, 2010 (Non-life)
Commercial sales
Retail sales
0%
3%
5%
8%
Brokers
9%
Agents
40%
31%
82%
2%
Source: ABI
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12%
7%
Banks
Direct (faceto-face)
Direct (other)
Other
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Figure 2.14: Market Shares per Distribution channel in the UK, 2010 (Non-life)
Motor insurance
Non-life insurance (excl. motor)
10%
Brokers
9%
Agents
35%
41%
24%
Direct (face-toface)
Direct (other)
43%
13
8%
Banks
2%
19%
5%
Other
Source: ABI
Figure 2.15: Evolution of Distribution Channels in the UK (Non-life Commercial)
100%
90%
80%
70%
Brokers
60%
Agents
50%
Banks
40%
Direct (face-to-face)
30%
Direct (other)
Other
20%
10%
0%
Source: EE compilation of ABI data
Brokers are the dominant model for distributing products to commercial clients: in the period 1992-2010
they have consistently accounted for between 80 and 90 per cent of all commercial premiums written. The
overwhelming success of brokers here is due to a number of factors, many of which operate on the
demand side:
 Reduced search costs. Due to their independent nature brokers can give access to a wider choice of
insurers and insurance products.
 Technical knowledge and informational advantages. Brokers are sought out especially in those areas
where risk coverage requires the purchase of complex insurance products. Specialisation can enable
brokers to better understand client’s needs especially when these call for the necessity of tailor-made
products. Furthermore, such insurance may well be underwritten at Lloyds’ market. This nearly always
involves brokers. They can also add value by offering very sophisticated risk management and loss
prevention services.
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 Negotiating and tailoring costs. When tailor-made products are required, brokers are able to negotiate
attractive contractual terms for their clients and, at the same time, they can assist insurers in the
development of non-standardised solutions.
Within commercial insurance, the typical size and structure of brokerage firms tends to be correlated with
the size of their typical corporate client. The growing share of direct writing in personal lines has pushed
brokers towards small and medium-sized business insurance. Large business insurance is predominantly
covered by a few very large brokers.
Broking in commercial
insurance is dominated by these very large firms. They can even actively underwrite insurance business
themselves up to a fixed limit of an insurance company’s capital, provided such an agreement is in place.
Insurance companies have sought to build their direct sales to smaller companies, though at present with
limited success.11
The evolution of distribution channels in the motor and non-motor segments are depicted below in Figure
2.16 and Figure 2.17.
Figure 2.16: Evolution of Distribution Channels in the UK (Motor)
80%
70%
60%
Brokers
50%
Agents
40%
Banks
Direct (face-to-face)
30%
Direct (other)
20%
Other
10%
0%
Source: EE compilation of ABI data
11
Topography of EU25 (2007) http://ec.europa.eu/internal_market/insurance/docs/solvency/impactassess/annexc08c_en.pdf
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Figure 2.17: Evolution of Distribution Channels in the UK (Non-Motor)
60%
50%
40%
Brokers
Agents
30%
Banks
Direct (face-to-face)
20%
Direct (other)
Other
10%
0%
Source: EE compilation of ABI data
The evolution of distribution channels in the retail segment has been very different to that in the
commercial sector. Brokers have lost significant market share to direct channels and affinity sales (the
latter distribution mode is included under the category “Other”) in the motor segment. Remote direct
selling has gained in significance (the “direct revolution”) over the past two decades.
It is important to appreciate that the ABI data do not separately identify sales through aggregators. It is
estimated that about 32 per cent of motor insurance policies were purchased through aggregators in 2010.
Insurers differ in how they account for such sales, and this may explain the apparent stabilisation in
brokered retail sales in the past several years. Some part of “direct” sales may also include those involving
an aggregator. It should also be noted that some important market participants (such as Direct Line) do
not list some (or even any) of their products on price comparison websites — but do sell significant
volumes on-line. It is possible that as much as 60 per cent of motor insurance is executed either directly
on-line or through price aggregators. We re-visit this topic in Section 4.
In non-motor remote direct selling appears to have stabilised whilst brokers have staged a noteworthy
recovery. Non-motor non-life products — such as home and travel insurance — are also increasingly sold
through a process that incorporates a price comparison site for execution as well as search. Again, this is
hidden in the ABI trend data.
Another key difference between the motor and non-motor segments is that, distribution in the former is
highly polarized (between brokers and remote direct channels), while in the latter it is more diversified,
with banks also playing a material role.
As we previously stated, the ABI does not publish distribution data for the life segment. However a report
commissioned by the Financial Services Authority (FSA) in 2009 notes that:
“Life and pensions are predominantly sold through the IFA advised or multi-tied bancassurance channels.
The latter, however, experienced a declining trend over the period, while the former has been growing
in importance (with the exception of 2007).
An additional notable feature is the small proportion of new business in life and pensions sold through
the non-intermediated route. This may be because consumers are more likely to use advisers (whether
independent or not) when products are perceived to be more complicated. This was confirmed in the
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Consumer Purchasing Outcomes Survey, where 42% of respondents who were close to acquiring a
pension, or had already acquired one, had used advice from an IFA as the most common source of
information.
A similar pattern emerges in relation to the distribution channels used by investment funds. There is a
trend away from direct sales and sales forces/tied agents and towards intermediaries. The most recent
data, for April 2009, shows that gross retail sales of investment funds through intermediaries accounted
for 85.4% of the total, with 4.8% of funds sold directly to the public by fund managers and 8.5% sold by
sales forces or tied agents. In the case of investment funds, anecdotal evidence indicates a significant
move towards sales through fund and life company platforms, which could explain the increase in
intermediated sales.
At the end of 2008 there were 12,129 advisory firms in the UK. The total number appears to have been
declining in recent years, although it is difficult to obtain exact figures due to changing definitions.” 12
2.6.2 Registered intermediaries
There are 73,000 physical persons registered as intermediaries with the FSA (since 1st April 2013 the
Financial Conduct Authority, FCA). Such registration is mandatory. The FCA’s groupings are:
 Intermediary companies selling insurance as their main activity — for example: agents and brokers
 Intermediary companies selling insurance as a secondary activity — this includes financial advisers,
wealth managers and mortgage brokers
 Direct selling insurers (e.g. on-line)
 Banks and building societies — includes banking groups that contain separate insurance mediation
entities
Table 2.5: Intermediaries Registered in UK, 2011
Physical
persons
LEGAL DEFINITION
Insurance intermediary companies
Intermediary representatives (sub-agents)
Intermediary companies selling insurance as a secondary activity
Intermediary representatives (sub-agents)
Direct-selling insurers
Banks and building societies
Legal
entities
5,858
Total
20,155
5,858
20,155
5,981
5,981
9,205
9,205
173
49
173
49
218
73,000
218
Individuals that sell insurance on an advised basis
Inactive firms (currently not recording revenue)
73,000
Total registrations
73,000
41,639
114,639
73,000
15,186
26,231
15,186
99,231
-
49
49
73,000
41,466
114,466
ECONOMIC INTERPRETATION
Agents
Brokers
(Insurance intermediary companies, primary and secondary
activity; individuals; inactive firms, intermediary representatives)
Banks and building societies (incl. bancassurers)
Total registrations
12
FSA (2009), Retail Distribution Review CP09/18.
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Source: FSA, Europe Economics
2.7 Spain
2.7.1 Market shares by channel
Figure 2.18: Market Shares by Distribution Channel in Spain, 2010
Life Insurance
Motor Insurance
Non-life Insurance (excl. motor)
2%
0%
6%
14%
4%
0%
14%
2%
5%
39%
13%
32%
Brokers
Banks
5%
73%
25%
Agents
Direct (face to
face)
Internet
15%
24%
27%
Source: ICEA and DGSP
Distribution data for Spain are reported below. We note that the categories have not been constant over
time. Prior to 2001 direct selling was broken down between face-to-face and other forms (mainly
telephone-based selling) but this distinction is absent from 2001 onwards. Similarly, sales conducted over
the internet were recorded as a distinct distribution channel only from 2000 on.
Figure 2.19: Evolution of Distribution Channels in Spain (Life)
80%
70%
60%
Agents
50%
Brokers
Banks
40%
Direct (face-to-face)
30%
Direct (other)
20%
Internet
Other
10%
0%
Source: EE compilation from ICEA and DGSP data
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Figure 2.20: Evolution of Distribution Channels in Spain (Motor)
60%
50%
Agents
40%
Brokers
Banks
30%
Direct (face-to-face)
Direct (other)
20%
Internet
Other
10%
0%
Source: EE compilation from ICEA and DGSP data
Figure 2.21: Evolution of Distribution Channels in Spain (Non-Motor)
60%
50%
Agents
40%
Brokers
Banks
30%
Direct (face-to-face)
Direct (other)
20%
Internet
Other
10%
0%
Source: EE’s compilation from ICEA and DGSP data
As with France and Italy, Figure 2.19 confirms the predominant role bancassurance plays in the life segment
in Spain. Banks accounted for less than 50 per cent of premiums distributed in 1994 but currently account
for more than 70 per cent. Indeed Spain is often cited as a prominent example of the bancassurance
phenomenon and the reasons behind its success are similar to those identified in other markets:
 The institutional and regulatory environment: integration between the banking and insurance sector
took place in Spain towards the end of the eighties when banks entered the insurance segment gaining
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significant market shares.13 In 1986 insurers linked to banks already accounted for 54 per cent of life
premiums written and by 1991 their market share had already reached 68 per cent.14
 Cost: banks have a comparative advantage over other distribution channels in terms of costs — banks’
employees tend to be less expensive than insurance agents.
 Proximity: banks can develop closer ties with their clients as customers visit bank branches more
frequently. Therefore banks can offer “one-stop shopping”, absent in other distribution models.
However, some authors have argued that a potential shortcoming of the Spanish model of bancassurance is
the relative lack of expertise amongst bank employees in insurance products.15
With regard to non-life insurance, the mix of and trends in distribution channels in the motor and nonmotor segments are very similar. In both agents represent the primary mode of distribution albeit that
their prevalence has gradually decreased over the last 15 years.
In the motor segment agents accounted for approximately 50 per cent of premiums written in 1994, while
they accounted for 40 per cent in 2010. In contrast brokers have gained market share (from around 20 per
cent in 1994 to less than 30 per cent in 2010). Another form of distribution that has gained significant
importance in the motor segment is remote direct selling. This was virtually non-existent in 1994 but had
reached a market share of 6.3 per cent by the end of 2000. Whilst such sales are not reported as a
separate channel after 2000, the rise in the prevalence of “Other forms of distribution” and “Internet” in
motor insurance indicate a further rise in remote direct selling in 2001-2010. Finally it is worth noting that
the internet has gained steadily in popularity as a distribution channel in the last decade — however it
remains in itself highly marginal.
A similar trend is observable in the non-motor segment: agents’ market share averaged around 45 per cent
for 1994-2000, but had declined to 32 per cent by 2010. Bancassurance has gained the most market share
in the period 1994-2010 (an increase of 7.5 per cent), followed by brokers (an increase of 2.5 per cent).
2.7.2 Registered intermediaries
There are three main intermediary categories in Spain:
 Agents — can be single or multi-tied. In the latter case, they can only be multi-tied for different
products (i.e. in effect, a set of single ties economically speaking).
 Brokers
 Banks — are registered as agents, and can thus be single or multi-tied.
Table 2.6: Intermediaries Registered in Spain, 2011
Physical
persons
51
Legal
entities
112
76,014
12,363
Brokers
Multi-tied Bank operators (agents)
900
2,125
-
59
Exclusive Bank operators (agents)
European intermediaries ¹
-
20
LEGAL DEFINITION
Multi-tied agents
Exclusive agents
13
14
15
Total
163
88,377
3,025
59
20
3,915
Rubio-Misas, M., “The Structure, Conduct, and Performance of the Spanish Insurance Industry”, Chapter 10,
Handbook of International Insurance, between Global Dynamics and Local Contingencies, Springer (2007).
Estebar-Jordar, L., (1993) “El Mercado Español de Seguros” Información Comercial Española 715: 15-44.
Cummins, J. D., and M. Rubio-Misa, (2005), “Convergence of Financial Services Markets. Evidence from the Spanish
Insurance Industry”, Working Paper, Wharton School, University of Pennsylvania.
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LEGAL DEFINITION
Total registrations
Physical
persons
76,965
Legal
entities
14,679
91,644
76,065
12,475
88,540
900
2,125
3,025
-
79
79
76,965
14,679
91,644
Total
ECONOMIC INTERPRETATION
Agents (Multi-tied and exclusive)
Brokers
Bancassurance (Multi-tied and exclusive)
Total registrations
Source: Seguros y Fondos de Pensiones, Informe 2011, Spanish Ministry for Economic Affairs and Competitiveness
2.8 Cross-country Comparisons
2.8.1 Cross-country comparison of commissions
Remuneration models vary significantly from country to country.
comparability of commission rates across countries:
Two issues arise regarding the
 First, commission rates have been provided at different levels of granularity (e.g. some stakeholders
provided separate figures for premium-based and overall commission rates).
 Second, product mix varies across countries and different product types may be associated with
different commission rates. Therefore a direct comparison for a broad risk segment (e.g. non-life) can
be problematic.
Notwithstanding these limitations the table below compares commissions by product areas and by country.
First year commission is shown separately from any commission payable in subsequent years — the latter
will only be relevant where contract lengths are above one year in duration (i.e. typically in life but only by
exception in non-life, e.g. in Germany where many non-life contracts outside of motor are frequently sold
on a three year contract length through the agency channel).
It can be observed that commission levels are generally higher for brokers than for agents within a
particular country-product pair (Spain’s data are an exception). Equally the range of commissions in nonlife excluding motor partly reflect product diversity in these categories. Product diversity is even more of
an issue in the life segment and we consider this separately. As noted already, more granular data are not
generally available.
Table 2.7: Cross-country Comparison of Commissions
Motor
Non-life, excluding motor
1st year
Other years
(where relevant)
1st year
Other years (where
relevant)
Agents
15%-16%
15%-16%
18%-22%
18%-22%
Brokers
15%-16%
15%-16%
18%-22%
18%-22%
Agents
5.5%-6.5%
5.5%-6.5%
23%-24%
14%-15%
Brokers
7%-8%
7%-8%
22%-23%
19%-20%
9%-11%
9%-11%
France
Germany
Italy
Agents
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19%-21%
19%-21%
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Motor
1st year
Brokers
Non-life, excluding motor
Other years
(where relevant)
1st year
Other years (where
relevant)
17%-19%
17%-19%
29%-31%
29%-31%
27%-29%
27%-29%
14%-28%
14%-28%
10%-25%
10%-25%
10%-25%
10%-25%
9%-11%
9%-11%
18%-20%
18%-20%
13%-14%
13%-15%
Netherlands
Agents
Brokers
UK
Agents
Brokers
Spain
Agents
Brokers
Source: Europe Economics analysis based on stakeholder interviews
We highlight the following:
 French retail agents organise themselves in unions according to the insurance company that they are
tied to — and each union negotiates commission percentages with its respective insurers. All these
unions are represented by the umbrella-organisation AGEA.
 In Germany the calculation of premiums in the most highly regulated sectors — such as health and life
insurance — are calculated based on the average distribution cost of the channel mix. Sales
remuneration is added to this. Monthly fees are common in the commercial segment in Germany, with
the split between these and commissions being approximately 40 to 60.
 In Italy, agents and brokers receive a combination of premium-based and contingent commissions.
 The Dutch broker channel was moving away from commissions when the data was gathered. This
anticipated the banning of commissions that became effective on January 2013. Brokers charging fees
before this date set them at €10–€25 per month dependent upon the product mix. The direct sales
channel is required to separate the cost of advice from the cost of distribution. The law provides for an
exception: insurers may provide a commission only if it is essential to the provision of the financial
service. How widely this is interpreted is still to be determined.
 In Spain, the most common form of remuneration for both agents and brokers is a combination of
premium-based and contingent commissions, although fees are also used by brokers.
In the life sector, product differences between countries militate against meaningful comparison of
commission levels, and so we do not report these data in tabular form. Before describing the data that we
do have, we make the following observations:
 Within any given country-channel combination commission rates tend to be higher for more complex
products. For example, in the Netherlands brokers may be paid 1–2 per cent of capital for protection
products whereas more complex life investment products can garner commissions of 2–3 per cent of
the capital.
 Within any given country, brokers tend to be remunerated more than agents (although Spain is a
notable exception). This reflects in part the nature of the life products distributed through these
channels.
 There is more intra-country variation than is the case in non-life insurance products.
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In Germany commission rates are about 2.5–4.5 per cent of the capital sum, calculated over the life of the
product, with the rates payable to agents at the lower end of this scale. The majority of this is payable by
the life insurer at contract acquisition.16 Data from the Netherlands (from before the prohibition of
commission on complex products) came into effect showed a somewhat similar position: here protectiontype products might have typical commissions of 1–2 per cent of capital; more complex (e.g. life
investment) products are associated with remuneration of 2–3 per cent. In France agents, again, are
remunerated at a lower level than brokers: 1–1.5 per cent versus as much as 10 per cent for brokers
(again, we note that this may simply reflect product differences, and also in nature of the services and
advice provided).
In Italy agents’ commissions range from one to three per cent; brokers’ commissions are much higher: 9–11
per cent. (These figures are over the life of the product.)
The latest available data from Spain indicate that brokers are paid 3.5–5.7 per cent with respect to new
contracts.17 Rates payable to agents are understood to be markedly higher than this (even above 15 per
cent). Whereas agents are paid wholly by the insurers, broker remuneration may be shared between the
client and the insurer.
The FSA’s Retail Distribution Review (RDR) meant that adviser charging rules came into force on 1 January
2013. This put an end to contingent commissions paid by insurers to brokers. Consequently,
intermediaries will be paid by their clients through fees whereas until then, fees and premium-based and
contingent commissions were used. Several stakeholders informed us that independent advisers had
flexibility in choosing the mix they preferred.
2.8.2 Cross-country comparison of intermediary penetration
We now compare the density of brokers and of agents (based on our economic interpretation) by the
population of the country in question. We present two figures: one being a narrow interpretation of the
intermediaries (by and large being those with direct relationships with both insurers and the local
supervisor) and a broad interpretation (where all registrants are included — for instance, sub-agents and
collaborators in Italy, excluded from our narrow interpretation). This only impacts upon the agency
numbers.
Table 2.8: Intermediaries by Economic Interpretation per 1m Population
France
Germany
Italy
Nether-lands
UK
Spain
Agents
504
442
617
57
243
1,918
Brokers
349
561
79
313
1,589
66
Total
853
1,003
695
370
337
1,984
Agents
504
2,592
3,745
57
243
1,918
Brokers
349
561
79
313
1,589
66
Total
853
3,153
3,824
370
1,833
1,984
NARROW INTERPRETATION
BROAD INTERPRETATION
Source: Europe Economics
16
17
See analysis by Beenken, http://www.asscompact.de/media/PDF/AssCompact/BeenkenTabelle.pdf
Informe Mediación 2008, Spanish Ministry for Economic Affairs and Competitiveness
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There are marked differences here, with Germany and Italy having notably more intermediaries relative to
population than the other countries when our broad interpretation of status is used — however with our
narrow interpretation, Spain becomes the country with the highest density of intermediaries. This
highlights the difficulties in making an effective comparison. It is worth noting that the data on the number
of intermediaries and the premiums sold through each channel imply notable differences in in the relative
size of the firms. When we use our broad interpretation we note that in Germany, Italy and Spain the
average agency generates annual premium revenue of €2–400,000 — in France and the Netherlands it is
above €1.5 million. The narrow interpretation places the average agency in all bar Spain above €1.5 million.
Brokers tend to be larger: the average Dutch broker intermediates over €3 million, with the average
Spanish broker at a similar level to this. French, German and Italian brokers are smaller — generating
around €1 million in premium income per annum.
2.8.3 Cross-country trends in channel choice
We have previously discussed country by country the key changes in channel choice and the drivers of
these shifts. We present below a consolidated comparison of these changes in both life and non-life for the
following channels: agents; brokers; and direct. .
Figure 2.22: Evolution of the Agency Channel in Life and Non-life
Source: Europe Economics
As we have already noted above, the agency channel has lost significance in most markets (including
Germany where hard data are lacking). The Italian non-life segment is an exception to this general trend.
As presented below, the broker channel has been stable or has typically lost share, particularly in non-life.
The Dutch life market is an exception to this. However, as we have noted, there has been some
cannibalisation within this channel — notably in the UK and the Netherlands — where aggregator sites
have gained at the expense of (smaller) traditional brokers.
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Figure 2.23: Evolution of the Broker Channel in Life and Non-life
Source: Europe Economics
The direct channel has experienced notable declines in France, Italy and Spain — this is due to a switching
from bricks & mortar direct routes in life to banks (in Spain remote selling, largely by phone, has gained a
presence in non-life). The gains in the direct channel in the UK and Dutch non-life markets, on the other
hand, highlight the growth of remote direct selling, i.e. by phone and through the internet.
Figure 2.24: Evolution of the Direct Channel in Life and Non-life
Source: Europe Economics
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2.9 Conclusions: The State of Distribution
Over the past twenty years traditional intermediaries in the insurance market have faced challenging
conditions as liberalisation and innovation have altered the competitive landscape. In particular the agency
channel has lost significance — at least in part — in most European markets (the Italian non-life segment is
a notable exception to this general trend). The broker channel has been stable or has typically lost share,
particularly in non-life (the Dutch life market is an exception to this). However, there has been some
cannibalisation here — notably in the UK and the Netherlands — where aggregator sites have gained at the
expense of (smaller) traditional brokers.
The direct channel has experienced notable declines in France, Italy and Spain — this is due to a switching
from bricks & mortar direct routes in life insurance to banks and bancassurance. Indeed bancassurance (or
at least the use of banks as a distribution channel for life insurance even where the bank is structurally
separate from the insurer) has been a major trend in itself with several reasons accredited for its success:
 Banks have a key informational advantage with readier access to high quality information about their
clients, or potential clients thanks to extensive branch networks and relatively frequent customer
interactions — important to building trust — and because banks are often the first to meet clients in
their purchasing cycle for investment products.
 Extensive use of customer databases to target specific client bases, shifting some administrative costs to
clients and the careful selection of insurance partners have provided cost advantages.
 A changing institutional and regulatory environment — from liberalising measures enabling banks to sell
insurance products to divergent tax treatments.
The gains in the direct channel in the UK and Dutch non-life markets, on the other hand, highlight the
growth of remote direct selling, initially by phone and then through the internet.
Where change has occurred its main drivers have been technological innovation and regulation. For
example the growth of banks as an important distribution channel in the life segment — particularly evident
in France, Italy and Spain — was driven by liberalising legislation in the context of markets lacking an
effective alternative. Similarly the gain — particularly in the UK and Netherlands in non-life products —
due to the growth in remote direct selling, first by phone and latterly on-line and the emergence of
aggregators can be seen in this light. These drivers appear likely to remain as such in the near future.
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3 The Drivers of Channel Choice
3.1 Introduction
The overarching purpose of this section is to identify the key drivers behind the choice of different
distribution models. We review the economic contribution of different distribution models: we look at this
first according to theory and then empirically. The primary sources of data underpinning this section are a
review of the relevant economic literature and about 20 structured stakeholder interviews conducted
between July 2012 and November 2012.
3.2 The Economic Contribution of Different Distribution Models: Theory
3.2.1 Introduction
We develop below a conceptual framework that allows us to identify the key economic issues arising in the
sale of insurance products. To create traction here we have categorised the wide range of products
considered across certain stylized dimensions.
A pre-condition for any sale is that the demand-side and the supply-side meet each other. A number of
factors (which operate on both sides of the market) affect the frequency with which suppliers and
customers are able to successfully conclude transactions. In general terms, these factors can be regarded
as transaction costs, as they represent potential obstacles to the successful conclusion of a transaction.
There are two broad categories of transaction cost that are particularly relevant in the context of
insurance markets.
 Market-matching costs — these costs reflect the specific needs of market participants. One the one
hand insurers may be interested in serving only certain type of clients or may have specific requirements
regarding the type of relationship they wish to establish with their customer base. On the other hand,
consumers may have interest only in specific product features, and/or type of providers.
 Asymmetric information — these costs arise because one party to a transaction has some relevant
information which the other does not. Such information asymmetry may be responsible for forgone
transactions or may adversely affect the surplus that one party is able to extract from a concluded
transaction.
A list of relevant matching costs and symmetric information issues is illustrated in more details below.
3.2.2 Market-matching costs
Supply-side costs
These represent the key economic decisions and preferences of the insurers themselves.
 Administrative and management costs — this is a broad category and includes those pecuniary costs
associated with the distribution of products. Examples are: the costs of setting up a branch, the costs
of training sales personnel, commission payments made to intermediaries, administration costs, etc.
 “Narrow-casting” costs — insurers may want to focus on a specific customer base. For example, if the
business model adopted is one where the emphasis is on profit per policy rather than sales volume, then
the ability to screen for a segment of high-willingness-to-pay consumers is particularly important. It is
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clear that some distribution models are more suitable than others in ensuring effective market
segmentation techniques.
 “Broad-casting” costs — in contrast to “narrow-casting costs”, if the business model relies on sale
volume rather than on margin-per-policy, then the ability to reach a very broad customer base becomes
vital. Direct marketing techniques or price comparator websites are examples of distribution models
intended to have a broad reach.
 Loyalty building costs — these are the costs incurred in order to maintain a loyal customer base, i.e. the
transaction costs in relation to the renewal of existing policies. For example, they may reflect the need
of providing specific offers to existing customers in order to retain them, or the capacity to cross-sell
additional products to that customer.
 Tailoring costs of complex products — consumers may have specific needs and require insurers to
develop tailor-made products, increasing the manufacturing cost. This can be particularly important in
the commercial sector where insurers may be required to develop ad hoc products to meet customerspecific needs.
Demand-side costs
A consumer’s purchase of an insurance product is not simply a case of minimisation of the price of the
product itself (the pecuniary cost). Other demand-side costs include:
 Search costs — having access to the whole market and being aware of a wide range of products
available is a pre-requisite for consumers to make good purchasing decisions. Consumers may not be
confident enough to buy unless they have the feeling of having explored a sufficiently wide range of
options.
 Information-processing costs — even if access to the whole market is possible it takes time and effort in
order to be able to compare the available options in a meaningful way. In the presence of relatively
standardised insurance products, where customers focus purchasing decisions mainly on price, the
information processing costs can be relatively low. However these processing costs are likely to be
higher in the presence of relatively complex products. Consumers differ in the way that they trade off
quality and price and comparisons between differentiated products (i.e. products that offer a different
price-quality mix) can be more problematic. In these instances face-to-face interaction with professional
intermediaries who provide an expert recommendation can add significant value to consumers’
purchasing experience.
 Negotiating costs — if consumers have specific needs then resources must be allocated in order to
negotiate specific contractual conditions and product features with the insurer. Intermediaries
(especially in the context of commercial lines) are expected to provide valuable service in this respect.
 Trust and transparency — transactions are more likely if consumers feel that they are being served from
trusted providers that sell products under transparent contract conditions. This also has implications
for cross-buying opportunities for consumers — where such trust is an important factor and the cost of
building the necessary trust is high, cross-buying (i.e. the single-sourcing of various financial services
products from a single sales point) is likely to be higher. Equally the rise of the internet as a distribution
channel is dependent on consumers’ increasing confidence in the safety of on-line transactions (which
can vary from country to country, just as it does from person to person).
3.2.3 Asymmetric Information
The insurance market is characterised by information asymmetries between insurers and customers.
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Supply-side
 Customers’ risk-profile — the first and most obvious information asymmetry affecting the supply side is
due to imperfect information regarding the customer’s risk-profile. A key driver of the success of an
insurance business model is the insurers’ ability to price risks as accurately as possible. Whilst for some
simple product lines (e.g. motor insurance) risk-pricing can be largely or wholly automated and kept fully
in-house, in areas characterised by complex risks the aid of an expert third party can facilitate the
alleviating of this type of information asymmetry.
 Customers’ taste, financial needs, consumption and purchasing behaviours — insurers may have only
limited access to valuable customer information. The associated asymmetries may be higher in the case
of intermediated sales where the customer ownership is not entirely in the hand of the insurers.
Demand-side
 Knowledge of product availability — potential transactions may not take place simply due to the fact
that consumers have only limited information on the entire range of products available (and recognise
this). On the other hand, consumers can also be overwhelmed by access to excessive unfiltered
information.
 Product quality and suitability — customers may have only a limited understanding of product features.
This asymmetry is likely to be most material in presence of long–term complex insurance products (e.g.
life insurance), where the suitability of a product can be assessed only with difficulty (and potentially only
with the benefit of hindsight, e.g. after the policy has matured or the insured risk has in fact
materialised).
 Nature of the sale and the quality of advice — information asymmetries also play a role in relation to
the nature of the sale and the quality of the advice received. For instance consumers may not be aware
of the contractual relationship between an intermediary and the insurers (e.g. whether he is tied or not)
and may not be able to fully appreciate the impact that remuneration agreements between the
intermediary and the insurer (e.g. volume-based commission) has on the quality or impartiality of the
advice received.
3.2.4 Product and customer characteristics
Given the wide range of insurance products considered by this study, it was necessary to provide a stylized
categorisation of products along key dimensions in order to be able to draw meaningful conclusions.
Consequently, products have been categorised along the following aspects:
 Range of product features typically available — insurance is a multi-dimensional product, i.e. features
other than price are important — but the degree varies by product.
 Customer ability (or inability) to assess optimal coverage and to compare products — appropriate
product comparison requires the ability to assess the trade-off between different dimensions (e.g.
quality-price trade-off).
 Customer ability to assess “quality” (i.e. outcomes) — this should be clearer for products purchased
more frequently, or where risks are more frequently realised.
In light of the above we adopted the following stylised matrix whereby specific product characteristics are
associated with specific implications for customers — and recognising that customers are heterogeneous
we further map these results on two stylised types of customer: self-directed customers and those that are
more convenience-driven.
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Table 3.1: Stylised Product Matrix and Implications for Distribution Models
“Standardised” products
(e.g. motor, home, travel, term-life, etc.)
“Complex” products
(e.g. investment-life, complex commercial
risk, etc.)
Narrow
Wide
High
Low
Clear
Opaque
Product characteristics
Range of product features
Ability of consumers to assess
optimal coverage and product
features
Ability of consumers to have a
clear expectation on outcomes
Implications for consumers
Implication for search activity
Customer search is focused on price
Implication
understanding
Customers have less need for advice
on
product
Implication on learning
Customers are able to learn from past
purchases
Customers search across multiple
product dimensions
Customers may need advice before
making a purchase
Customers are not able to learn from
past purchases
Implications for distribution
models
Self-directed consumers
No interest in pre-sale advice from third
parties
Prefers search through price aggregator
or other remote channels and will seek
out advice as considers necessary
Convenience-driven consumers
Preference for pre-sale advice and postsale assistance
Likely existing weak preference for
physically situated agents. May learn to
rely on price aggregators where present
Likely to research products but less likely
to execute without pre-sale advice (i.e.
recognition that quality assessment is
elusive)
Likely to gravitate towards brokers (nonlife) and banks/independent advisers (life)
Greatest need for pre-sale advice
Likely preference for wherever most
trusted relationship lies
Likely existing strong preference for
physically situated agents
This indicates that there will be a community of customers that prefers face-to-face contact with the more
complex products, and even with what we are broadly classifying as “standardised” products. Customers
that attach significant value to pre-sale advice and post-sale assistance are likely to prefer direct interaction
with those with whom they have a personal relationship. This heterogeneity of customers’ preferences
(self-directed customers versus convenience-driven customers in this context) is recognised by insurers as
a key driver for the development of multi-channel strategies by insurers.
Aggregators have enabled self-directed consumers to fulfil more processes independently. This can be seen
as driving increased polarisation between price (cost leadership) and quality. This is most clear when
considering the sale of more standardised products (such as motor) with the distribution of more complex
ones, but is not restricted to this divide.
3.3 The Economic Contribution of Different Distribution Models: Evidence
3.3.1 Approach to testing the theoretical analysis
Our primary source of evidence was 20 structured stakeholder interviews conducted between July 2012
and November 2012. These included variously insurance undertakings, agents, brokers, and trade
associations (insurance and intermediary associations) and were spread evenly across the countries of
interest to this study. In addition we interviewed an academic specialising in insurance intermediation.
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A question template was designed and sent to stakeholders prior to the interview. Post-interview a file
note summarising the interview and a document summarising key facts relating to the country of interest
were sent to the interviewees for confirmation. Once this process was complete we synthesised the
evidence gleaned in order to assess our model of the drivers of distribution choice. The output of this
process is set out below.
3.3.2 Empirical results
The evidence largely confirms the stylized facts presented above, albeit with some variation by product.18
The diagrams below map the relative strength of the various demand-side and supply-side drivers of
distribution choice that we have discussed above. Figure 3.1 and Figure 3.2 can be seen as illustrating types
of the “standardised” product referred to above. These are similar but not identical — insurance is highly
heterogeneous and any stylisation will not match up precisely to reality. Similarly, Figure 3.3 and Figure 3.4
address types of “complex” product. Again, these are similar but not identical to each other: they do,
however, differ notably from the representation of the drivers of the more standardised products.
Tied agents
Medium/high
Medium/low
na
na
Low
Independent
Bancassurance
na
High
intermediaries
Direct
Key:
Price aggregators
Figure 3.1: The Drivers of Distribution Choice in Motor Insurance
Supply-side drivers
Pecuniary costs
Information costs
Transaction costs
Degree to which distribution cost is reduced
Degree to which information asymmetry is reduced
Ability to make use of customer information (e.g. cross-selling)
Ability to tailor or facilitate complex transactions
na
na
Demand-side drivers
Pecuniary costs
Information costs
Transaction costs
Ability to minimise price
Ability to reduce search costs
Ability to cross-buy (i.e. one-stop shopping)
Ability to access, process and understand product quality & suitability
Agency is an economically efficient method of distribution where a suitable network already exists. In
those countries where agents represent the dominant distribution channel for retail non-life products (e.g.
France, Germany, Italy and Spain) the following specific factors are found to be, alongside price, important
in driving channel choice for customers:
 The provision of post-sale assistance (e.g. in claims management). This was identified as a key factor
across all types of stakeholder in all countries where agency is dominant, as well as in the Netherlands.
 Proximity (i.e. convenience). Our stakeholder interviews also widely supported this point, with a
French agency, and French and Italian insurers highlighting its particular importance in their markets.
 Personal relationships (i.e. trust).
Similarly with regard to the supply-side, the perceived comparative advantages of agents versus brokers —
in agent-dominated countries — relate to the high control over the distribution channel, improved
profitability due to low distribution costs, cross-selling opportunities and customer retention.
18
This is more marked than the variation that we have found by country so we report here on a cross-country basis,
noting country-specific factors as we go.
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Direct selling and, to an increasing degree, sales through price aggregators can offer consumers low cost
solutions in product areas such as motor where the self-directed consumer does not believe that advice is
necessary and is content to make a self-sufficient choice. The trend towards penetration of motor by
aggregators has been particularly marked in the UK, with the Netherlands and Germany somewhat behind.
This can be seen as part of a trend towards increased commodification in motor insurance, with price
conscious consumers making different distribution choices than those with other motivations. We discuss
the increasing emergence of multi-channel strategies in a later chapter (Section 4).
Low
Independent
Medium/low
intermediaries
Medium/high
Tied agents
Direct
High
Bancassurance
Key:
Price aggregators
Figure 3.2: The Drivers of Distribution Choice in Non-life Insurance (excluding Motor)
Supply-side drivers
Pecuniary costs
Information costs
Transaction costs
Degree to which distribution cost is reduced
Degree to which information asymmetry is reduced
Ability to make use of customer information (e.g. cross-selling)
Ability to tailor or facilitate complex transactions
Demand-side drivers
Pecuniary costs
Information costs
Transaction costs
Ability to minimise price
Ability to reduce search costs
Ability to cross-buy (i.e. one-stop shopping)
Ability to access, process and understand product quality & suitability
The value brokers add through pre-sale advice remains valid also in the retail non-life insurance segment.
Market participants from countries where brokers are the dominant channel here (i.e. the Netherlands and
UK), as well as German and Spanish brokers have confirmed that the quality of pre-sale advice and the
ability to access market-wide information are amongst the key reasons for consumers to choose brokers as
their preferred channel. Insurance products differ in a number of dimensions (e.g. in the way claims
management is handled) and brokers can play a role in enabling customers to find the optimal balance
between price and quality.
This is consistent with the evidence that, for products that have become more standardised (notably motor
and also increasingly home insurance), brokers are subject to material competitive pressure from price
comparators websites. On the other hand detailed knowledge of the customers’ situation (gained through
a long-standing personal relationship) and the ability to actively recommend products that the customer
might not be aware (cross-buying opportunities) remain factors favouring the broker channel.
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na
na
na
Ability to make use of customer information (e.g. cross-selling)
na
na
Ability to tailor or facilitate complex transactions
na
na
Ability to minimise price
na
na
Ability to reduce search costs
na
na
Ability to cross-buy (i.e. one-stop shopping)
na
na
Ability to access, process and understand product quality & suitability
na
na
Direct
Medium/low
Independent
na
Degree to which information asymmetry is reduced
Medium/high
intermediaries
Degree to which distribution cost is reduced
High
Tied agents
Low
Bancassurance
Key:
Price aggregators
Figure 3.3: The Drivers of Distribution Choice in Commercial Insurance
Supply-side drivers
Pecuniary costs
Information costs
Transaction costs
Demand-side drivers
Pecuniary costs
Information costs
Transaction costs
The key added value to customers received from brokers relates to the quality of independent pre-sale
advice and the possibility of having access to market-wide information. This is particularly evident in the
commercial segment where (irrespective of the country considered) brokers are the dominant channel.
This was confirmed by all participants interviewed who had an interest in the commercial segment. The
highly specialised nature of commercial brokers becomes essential in decreasing negotiating and producttailoring costs and therefore here brokers can act as “market makers” (as opposed to simply being “market
matcher” — a function that can be “equalled” by price aggregators in less bespoke product lines). The
ability to facilitate such complex transactions can also make this an attractive channel for the supply-side in
this product category.
Low
Independent
Medium/low
intermediaries
Medium/high
Tied agents
Direct
High
Bancassurance
Key:
Price aggregators
Figure 3.4: The Drivers of Distribution Choice in Life Insurance
Supply-side drivers
Pecuniary costs
Information costs
Transaction costs
Degree to which distribution cost is reduced
Degree to which information asymmetry is reduced
Ability to make use of customer information (e.g. cross-selling)
Ability to tailor or facilitate complex transactions
Demand-side drivers
Pecuniary costs
Information costs
Transaction costs
Ability to minimise price
Ability to reduce search costs
Ability to cross-buy (i.e. one-stop shopping)
Ability to access, process and understand product quality & suitability
Complex life shares many of the drivers of distribution choice with the commercial segment. A critical
difference is the ability of banks to leverage pre-existing relationships and the information so accumulated
to compete effectively in this area in most countries.
On the other hand direct selling (in non-life) and bancassurance (at least in the life segment) are seen as
more economically efficient methods of distribution than agents and brokers. Where bancassurance has
grown it has traditionally been explained by a banks’ ability to exploit client data and information on
consumption patterns in order to maximise cross-selling opportunities and to reduce information
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asymmetries, and a low marginal cost of interacting with those customers. As we have described
previously, increased prominence of bancassurance as a distribution channel has been particularly
noteworthy in the life segment in France, Italy and Spain where it has come at the expense of agents (in
Italy and Spain), and a broader mix of channels in France. The factors behind such changes are discussed
further in the country profiles within Section 2.
Penetration by aggregators is particularly limited here, with very little development outside of execution
only business — on-line advice remains a hard challenge to resolve, as was highlighted to us by Dutch and
British insurers. This is also a restriction on the level of on-line direct sales in this area.
3.4 Conclusions: Drivers of Channel Choice
We have identified in this chapter how the economic contribution of the different channels varies both in
theory between different product and consumer types.
Our research indicates that the drivers of channel choice in practice largely mirror the theory — but this
does not mean that insurance markets are converging on a single “optimal” distribution model. Firstly,
such an optimal model may be transient. More importantly, other features, such as the historic starting
conditions (as described in Section 2) and regulatory change (see Section 5) also play constructive roles.
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4 Trends in Distribution Choice
In Section 2 we described the recent evolution of distribution between different channels (see Figure 2.22,
Figure 2.23 and Figure 2.24 for a summary of these). There are also trends that are not caught fully by the
historic data as yet. We highlight three in particular in this section:
 Price aggregators. Also known as price comparison sites, these are becoming increasingly important in
“simpler”, more standardised insurance products. We consider the economic role of the aggregators,
consider evidence from the UK — where aggregators have had the most significant impact so far — and
consider their impact to date in the other countries of interest to this report.
 The incentivisation and governance of intermediaries. This compares a number of key issues — such as
restrictive agreements, pecuniary and non-pecuniary incentives, client ownership and profitability — for
brokers and agents, differentiating carefully between the different countries.
 Multi-channel strategies. This is where an insurer sells fundamentally the same product through several
different distribution channels. We analyse this in the context of the insurer’s objectives such as the
mitigation of commercial risk and building strategic business value.
In addition we discuss another factor — regulatory change — in the final chapter of this study and discuss
how it might impact on the future evolution of distribution.
4.1 Price Aggregators
Price aggregators, or price comparison websites, are internet-based platforms that provide consumers with
the opportunity to compare, in an easy and quick manner, quotations of a particular product. Quotations
are customised to key characteristics of the individual and (in most cases) facilitate the execution of a
purchase on the basis of the search outcome.
In order to put this phenomenon into context we first consider the impact that the internet has had on
shopping behaviour in the insurance market. In Europe in the early 2000s, the distribution of insurance
products on the internet was highly limited due to a number of supply-side and demand-side factors.
On the supply-side, insurers were hesitant to approve and complete financial transactions on-line.19
Insurers were unwilling to introduce a new distribution channel due to concerns that this would create
additional competition between new and existing distribution channels with a potentially substantial loss of
sales.20 Most insurance companies therefore originally adopted the internet as a means of distributing
information regarding the products they offer, without allowing on-line transactions.21
Similarly, on the demand-side, consumers’ confidence in shopping on-line was relatively low due to some
scepticism about the security of on-line transactions. Moreover, and specifically in relation to insurance
products, traditional off-line distribution channels have a particularly attractive feature which was (and
largely remains) absent on-line: they allow consumers to have face-to-face interaction with an expert
professional who can assist them in their purchasing choice.
19
20
21
Theil, M. (2011), Insurance on the Internet: a Different View, International Business & Economics Research Journal
1(6), pp45-50.
Rakovska, G. (2001), E-Commerce Business Models for Insurance: Application to the U.S. and European Markets,
Centre for Risk Management and Insurance Research – Georgia State University.
Alam, A., M. Salim and H. Shah (2009), The Potential of E-Commerce in the Insurance Industry: The Road Ahead,
Global Journal of Enterprise Information System, pp36-41.
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Due to these reasons, the internet was originally used primarily as a means for gathering and transmitting
information about products rather than as a means to execute transactions. A key attribute of price
aggregators is that they represent a virtual market place where transactions can are made so this meant
that the full potential of the internet was not being utilised.
4.1.1 Price aggregators’ business models
One way in which price aggregators’ business models can be distinguished is according to the way in which
revenues are generated. We describe below alternative ways by which price aggregators generate
revenues:22
 Downstream charges: this involves charging consumers for the search services provided. Though
theoretically possible, in reality this model is the exception rather than the norm. The vast majority of
price aggregators do not charge consumers directly but generate revenues through other means (e.g.
advertising, sponsored links, and/or up-stream charges).
 Advertising and sponsored links: under this scenario neither consumers nor suppliers are charged
directly. Instead the price aggregator exploits its ability to attract a large number of visitors and charges
other companies who wish to place advertising bans on the website. Alternatively a price comparator
can be used as a gateway to other non-insurance websites (for which a link is provided) in exchange for
payment.
 Upstream charges: this business model is by far the most popular (and in fact will constitute the main
focus for this case study) and consists in charging product/service providers. These charges can take
different formats:

Subscription fees: product/service providers are charged a fixed fee for the right to be listed on the
website.

Click-through fees: product/service providers are charged for every click through to their websites.
This remuneration type can be further distinguished into two broad categories: (i) cost-per-click
(CPC) — in which case the price aggregator receives a payment every time a consumer is referred
to the suppliers’ website from the aggregator — and (ii) cost-per-action (CPA) — where a charge is
made only if a certain action is completed, e.g. only if a completed insurance quote is obtained).

Commissions: this is similar to the remuneration used for traditional intermediaries (e.g. agents and
brokers). Payments (which can be either fixed or a percentage of the transaction value) are made
contingent on a transaction being successfully executed.
 The sale of information gathered on consumer preferences to insurers, or other interested parties.
It is important to stress that in practice business models may be a hybrid of these (e.g. the aggregators
receive a subscription fee plus a click-through fee).
4.1.2 Economic analysis of price aggregators
From an economic viewpoint the following are particularly relevant.
 Search costs. The primary contribution of price aggregators lies in decreasing consumers’ search costs.
By providing a quick way to compare price quotations they simplify and shorten the price discovery
process. In turn, this can lead to price reductions and an increase in consumer welfare. In fact it is
22
This summary is based upon an analysis of the business practices of aggregators based in the UK, which as noted,
also operate sites in the other countries of interest to this study.
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argued that the emergence of price comparator websites may be responsible for the decrease in the
price of term life insurance sold in the USA in the 1990s.23
 Network effects. Price aggregators represent a form of two-sided market where network effects play a
key role (i.e. the value of participation is increasing in the number of participants). On the one hand, the
attractiveness of price aggregators to insurers depends on the number of consumers visiting the
website. On the other hand, the value consumers obtain by using the website depends on its market
coverage, i.e. on the number of insurers and the products listed.
 Transaction costs. Price aggregators can be viewed as traditional intermediaries that facilitate market
transactions and represent an alternative to direct market search (one in which consumers deal directly
with the insurers). The existence of an intermediated market depends upon its ability to decrease
transaction costs relative to the direct market. On the demand side, the most significant transaction
cost saving that can be obtained by using price aggregators, are search costs. On the supply-side costs
savings relate to the insurers’ ability to reach a broad customer base without the need to open branches
or relying on traditional and possibly more expensive distribution channels (e.g. agents and brokers).
Another potential cost saving that could be achieved by relying on price aggregators is in advertising
costs. Price comparator websites need to invest in extensive advertising campaigns — to direct traffic
towards their sites — from which all listed insurers can benefit. On the other hand (a) marketing costs
incurred by the aggregators are likely to be passed on to the insurers, mitigating any saving, and (b) to
the extent that price is not the sole determinant of consumer choice, some degree of advertising by
insurers would remain valuable to them.
4.1.3 Limitations of price aggregators
Despite these potential social benefits of price comparator websites, a number of criticisms or limiting
factors have been highlighted.
 Listing bias. This is the concern that bias may exist in the way products and suppliers are listed. This
may be due to inter alia:

Some comparator websites are owned by insurance companies, and therefore these may be given
“privileged treatment”.24

The use of commissions may incentivise price aggregators to favour certain products or suppliers.
This concern is analogous to those sometimes raised over the use of commission for more
traditional intermediary channels (e.g. agents and brokers).
 Market coverage. Price aggregators do not provide full market coverage. In fact some insurers (notable
examples being Direct Line and AVIVA in the UK — historically the two market leaders) explicitly
preclude listing on price comparator websites, at least, in AVIVA’s case, for part of their product
portfolio. The less comprehensive the market coverage, the lower the benefit to the consumers using
it. Furthermore, if consumers mistakenly believe that all products are listed they may make purchase
under the false belief that they have bought the cheapest (or otherwise best suited) product available in
the market.
 Information disclosure. Price aggregators’ failure to disclose in a transparent manner key aspects of
how they operate (e.g. whether they are owned by an insurer, the mechanism by which they generate
23
Brown J., and Goolsbee, A. (2002), “Does the Internet Make Markets More Competitive? Evidence from Life Insurance
Industry”, Journal of Political Economy 100, 481-507.
24
For instance, in the UK, Confused.com and Comparethemarket.com (two major insurance comparison sites) are
owned by the insurance firms Admiral and Budget respectively (see “The Use of Comparison Sites in the UK General
Insurance Market”, Consumer Intelligence report)
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revenues, the degree of market coverage, etc.) can intensify the potential for inefficacies identified
above.
 Misalignment of incentives with insurers. Unless there is close cooperation between insurers and price
aggregators (e.g. the adoption of filter mechanisms and the use of appropriate risk-variables to provide
individual quotations) inappropriate sales might take place. For instance, one commentator has argued
that the “financial comparison websites [he was] dealing with assumed that all users had good credit
records and that failure to filter out problem cases facilitated inappropriate application, leading to
applicants failing credit checks which in turn worsened their credit records”.25
 Excessive focus on price. The potential benefits of price comparator websites are greater when listed
products are homogenous and, consequently, consumers’ purchasing decisions depend mainly on price.
In fact this explains why for relatively “standardised” insurance products (such as retail motor and home
insurance) price aggregators have become particularly important as a distribution channel. However,
even within such products there is some degree of differentiation (e.g. optional add-ons, claims
management services, etc.). The increasing importance of price aggregators has therefore been
criticised on the grounds that it may induce consumers to make purchasing decisions based exclusively
on price and by neglecting other important quality considerations which may not be given weight in the
aggregator’s selection algorithms. Even life and non-life insurers from countries such as Spain and
France where aggregators have made little impact to date highlighted this concern to us.
 Pricing mechanisms. Two key aspects have been identified as being potentially problematic:

Dynamic pricing — this equates to changing the price of a given product in response to demand (e.g.
if a consumer returns to a previously visited site the price quotation he obtains for the same
product may be higher than the one obtained at the first visit, unless the price aggregator offers the
opportunity to save the quotation on a time-limited basis). By pricing dynamically comparison
websites can gradually increase quotations with each additional visit and might encourage consumers
to make hasty purchases, if the consumers are aware of the practice. Economically speaking,
dynamic pricing is not detrimental. It is not even innovative as a concept, since it can be part of any
marketplace: the innovation is narrower, lying in the encoding of the pricing process.

Partitioned pricing — the price list advertised on the website might not correspond to the actual
prices consumers would pay if they decide to conclude a transaction. Insurers may impose additional
surcharges (e.g. administrative costs, charges for using specific payment methods, etc.) and these
may be revealed to consumers only at the very last stages of the on-line transaction process. These
practices represent increased search costs because consumers need to access multiple transaction
pages of in order to discover the actual price of each product. In turn this has the socially
detrimental effect of reducing consumers’ shopping around.
4.1.4 Evidence from the United Kingdom
It is estimated that, in 2007, 20 per cent of motor insurance policies in the UK were obtained though price
aggregators.26 Since then price aggregators have certainly increased their popularity — with about 32 per
cent of motor insurance policies purchased through aggregators in 2010.27 According to research
conducted by Consumer Intelligence, as of December 2009, 89 per cent of people shopping for home
25
26
27
Stone, M. (2006), “Money Aggregators: Paradise or Purgatory for Buyers and Providers of Financial Services?
Moneyexpert/University of West England, UK.
Laffey, D., "Value Configurations in E-Commerce: Evidence from Comparison Websites" (2008). ECIS, 2008
Proceedings: Paper 36.
Ernst & Young, 2011, "Bringing profitability back from the brink of extinction: a report on the UK retail motor
insurance market".
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insurance quotes used a price aggregator for at least search. 28 The figure is even higher for motor
insurance.
The market shares (measured by number of visits) reported in Figure 4.1 below indicate that
Moneysupermarket, Go Compare, Compare the Market, and Confused, have consolidated their share to
over 90 per cent of the total number of visits to aggregators. The other participants are widely speculated
to be unsustainably small.
Indeed, advertising and brand recognition are key drivers of the commercial success of price aggregators.
According to Nielsen, advertising spending for price comparators was equal to £35 million in 2006 and had
almost doubled to approximately £85 million by 2009, and no doubt more since. This led Deloitte to
conclude that the UK market of price aggregators has reached saturation point with very low prospects for
new entrants, unless they have a significant advertising budget.29
Figure 4.1: Market Shares by Number of Visits
Source: Experian Hitwise data (from Moneysupermaket.com Interim Results)
These leading price aggregators operate in numerous personal insurance segments. Amongst these
Moneysupermarket, Go Compare and Compare the Market offer commercial products also.
Table 4.1: Product Coverage of the Leading Price Aggregators in the UK
Moneysupermarket
Go Compare
Compare the Market
Confused
Uswitch
Insurance products listed
Motor, home, travel, pet, dental, business, landlord, breakdown cover, payment
protection, health and medical, mortgage protection, wedding
Motor, home, travel, pet, life, business, landlord, payment protection, health and
medical, mortgage protection
Motor, home, travel, pet, life, health, landlord, business
Motor, home, travel, pet, life,
Motor, home, travel, pet, life, health
Source: EE analysis of websites (November 2012)
The trend is towards increased scope in terms of the products covered, with products in life, travel and pet
insurance typically being added. Price comparators’ coverage measured by the number of insurers listed
has also increased significantly. For instance the number of home insurance and motor insurance brands
28
29
“The Use of Price Comparison Sites in the UK General Insurance Market”, Consumer Intelligence.
“The Use of Price Comparison Sites in the UK General Insurance Market”, Consumer Intelligence.
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listed by the top price aggregators increased from 81 and 145 (for home and motor respectively) in 2009
to 113 and 177 in 2010.30 (Given that, as we have noted above, some leading brands have opted out the
effective coverage of the market may be less impressive than this.)
Away from insurance all of the leading sites in the UK also offer a comparable service in other product
categories, such as credit cards and utilities.
A number of trends can be observed in the way price comparators are being used.
 Use of multiple price aggregators is on the rise. According to Consumer Intelligence’s Insurance
Behaviour Tracker data the average number of price aggregators used by motor insurance switchers
increased from 1.27 in 2004 to 2.14 in 2009, indicating growing consumer sophistication and also
perhaps increased price sensitivity.
 Use of multiple price aggregators is correlated with higher switching rates. According to the same
source, 2009 data show that the motor insurance switching rate among users of a single price
aggregator was 69 per cent as opposed to 82.5 per cent for those using multiple sites.
 Individual price aggregators can have low conversion rates. Amongst motor and home insurance
switchers who have used a price aggregator, only 53 per cent and 45 per cent respectively had used a
price aggregator to arrange a new policy. The most commonly quoted reason for not purchasing a
policy through a comparison website was the belief that more attractive offers could be found by dealing
with the insurer directly.
 Transition to alternative products. The existing aggregators have diversified beyond their initial product
offerings — many started with a focus on motor (or motor and home) insurance but have expanded the
range of products offered across almost the entire spectrum of non-life insurance. Simpler life insurance
products are increasingly on offer. (Investment products with an insurance wrapper are not typically
sold as a discrete category — rather these are available on an execution only basis, i.e. without advice,
with similar investment products on certain of the aggregators and through other platforms).
 Increased deployment of on-line tools. On-line tools are being used to improve the customer
experience — in an attempt to generate loyalty to the aggregator — and also to educate customers.
 Trend towards commodification and competition on price. It is often observed that the increased use
of aggregators has resulted in more standardised products and an increased focus upon price
competition. A counter-trend has latterly been observed due to at least some consumers realising that
apparently simple products bought on-line are less simple than perceived at the point of sale. The
significance of this counter-trend is not yet clear.
4.1.5 Comparison of the UK to the other countries
Table 4.2: Conversion Rates for Price Aggregators in Retail Financial Products in Europe (2009)
Research of any retail financial
product
Purchase of any retail financial
product
Implied conversion rates
FR
DE
IT
NL
UK
ES
18%
25%
11%
50%
43%
20%
3%
11%
4%
20%
28%
5%
17%
44%
36%
40%
65%
25%
Source: Forrester Research, Europe Economics analysis
As described above the use of price aggregators for both obtaining quotes and concluding transactions in
the UK and the Netherlands are significantly higher than in France, Spain and Italy. Germany’s experience
is somewhat in between.
30
“The Use of Price Comparison Sites in the UK General Insurance Market”, Consumer Intelligence.
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Data from 2011 relating specifically to insurance products reveal a similar picture:31 UK consumers lead
with 28 per cent having bought through a comparison website, with Spanish and French consumers lagging
at 8 and 9 per cent only. About 15 per cent of German, Italian and Dutch consumers were estimated to
have purchased at least one insurance product through this channel.
Cultural differences in the desire for personal contact in consumer decision-making are strongly correlated
with these varying penetration rates. Whereas less than one quarter of UK consumers preferred personal
contact for a renewal decision, well over half of French and Spanish consumers shared this preference.32
The ease and availability of personal contact also varies significantly by country, as illustrated in Section 2. It
is also worth noting that the desire for personal contact in making a claim was less variable (e.g. twice as
many Britons preferred a personal contact in a claim situation than when making a renewal).
Another differentiating factor is the pre-existing prevalence of the broking channel. Price aggregators can
be characterised as impersonal brokers — if this channel was previously extensive then the transfer on-line
should be facilitated for both consumers and insurers. The latter will be more used to dealing with an
independent intermediary channel (and may lack alternatives to it).
France has amongst the lowest penetration by aggregators at present. In France, price aggregators are
registered as intermediaries — as indeed is the case in the UK. Local regulation requires intermediaries to
provide pre-sales advice and in consequence price aggregators frequently have to re-direct consumers to
either an agent or broker once they are ready to purchase. Commentary from a French insurer and a
French agent suggested that this reinforces the cultural preference for personal contact noted previously.
The main impact of the aggregators to date has been increased on-line search.
In Germany price aggregators are registered as brokers at the German Chamber of Commerce, the
Industrie- und Handelskammer. Progress to date by the aggregators has been well below that in the UK.
Both brokers and insurers in Germany expect limited further development in the medium-term, likely to be
at the expense of smaller brokers.
The data-point referred to at 4.1.5 above putting the Italian market on a par with Germany and the
Netherlands is out of kilter with all other feedback that we have seen and on balance it seems unlikely that
price aggregators have made more than limited in-roads into the Italian market. A review of existing
aggregators in the Italian market indicates that participating insurers tend to be typically smaller players and
new entrants, i.e. those lacking access to other routes to market. It is worth noting that Admiral Insurance
— the UK insurer that owns confused.com — set up a price aggregator website in Italy, Chiarezza.it, but it
has since exited the Italian market, selling this site in April 2012. Admiral also set up sites in France and
Spain.
Dutch consumers appear to be closest to the UK’s in their approach to aggregators. The Dutch sites
typically offer a review of the insurance and ancillary services provided. Some of the Dutch insurers
interviewed as part of this study expect the shift away from commission-based remuneration to damage
price aggregators.
We note that moneysupermarket.com — the UK’s largest aggregator — receives only about one per cent
of its revenue as commissions per se (it does receive significant revenues from product providers in the
form of fees per application on a click-through basis — whether these would count as “variable
remuneration” under IMD2 remains unclear, as we discuss further in Section 5).
In the Spanish market, price aggregators are used mostly for information gathering by consumers looking to
purchase motor insurance: once their information set is complete, consumers tend to go to an
intermediary to make the purchase. Nevertheless there is a concern amongst the Spanish market
participants (specifically brokers and insurers) interviewed that this emphasis on the price element may
31
32
Ernst & Young, Global Consumer Insurance Survey, 2012.
Ernst & Young, Global Consumer Insurance Survey, 2012.
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reduce consumers’ perceived value of elements present in other distribution channels, e.g. pre-sales advice.
The expected result is cannibalisation of the share in the sale of standardised products held by brokers.
4.1.6 Conclusions on price aggregators
Price aggregators facilitate research on price and product availability. For many consumers this means that
aggregators are replacing part of the economic value traditionally provided by intermediaries, particularly
brokers. This may mean that brokers will need to focus upon high quality advice — where that is required
— in order to maintain or grow market position.
Trivially such a transition of customers from lower-quality brokers towards aggregators must be restricted
to those countries with a tradition of a strong broker channel in non-life, particularly the UK and the
Netherlands. It is these countries also where insurers are used to dealing with independent intermediaries
so that any culture-shock associated with price aggregators is reduced.
In markets where brokers have not had such a role in non-life distribution — particularly France, Italy and
Spain — price aggregators have struggled to make an impact with insurers (i.e. offerings tend to be limited
to newer entrants or smaller participants) and as a consequence consumer interest has been less. Of
course, there remains scope for a market disruptive move by a major participant towards this channel in
these countries. That this has not yet happened may reflect concern over the possible short-term nature
of any gains to be had from such a move (since success would breed imitation) and concern over the
cannibalisation of existing channels, particularly tied agency, affecting the sustainability of the latter.
In the life sector there is considerable effort being made by some participants to discover an effective
means of providing advice on-line. To date this has not met with notable success.
4.2 Incentivisation and Governance of Intermediaries
Understanding the governance relationship between insurers and intermediaries is crucial to understanding
the degree of integration between these parties. We begin by describing the framework justifying and
motivating these various governance mechanisms.
A common problem arising in markets where suppliers sell products through intermediaries as opposed to
selling directly to consumers is the presence of inefficiencies in the supply chain attributable to the potential
conflicts of interest between the supplier and the intermediary. In the context of insurance products
conflict of interest may arise for a number of reasons:
 Intermediaries do not put sufficient effort into selling a given insurer’s products — as a result insurers
may sell products at higher prices in order to reach a given profit target.
 Intermediaries do not conduct an appropriate risk selection of customers — as a result an insurer’s
profits would require protection to reflect the higher risks.
 Intermediaries are not effective in retaining existing customers — insurers have necessarily less
information about new customers that they do about old ones. As a consequence there is limited scope
to “reward” old policyholders with ad-hoc offers that would not be otherwise available (or would be
available at a higher price) for new customers.
These will tend to result in under-insured consumers. Agents deliver the highest level of vertical
integration (other than direct sales), providing control; by retaining at least partial autonomy appropriate
incentives for agents to put sufficient effort into selling are retained. Agents are most likely to be costeffective relative to brokers with simpler products. This may be promoted nowadays by more customers
being armed with market search data (e.g. from the internet), and (b) any value-added from brokers in
terms of advice being less relevant. We discussed these issues with stakeholders (insurers, brokers and
agents) in all of the countries relevant to this study. We synthesise the conclusions of this exercise below.
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4.2.1 Restrictive agreements
The de facto representation of the interests of a single company — or a limited set of companies — is a
fundamental part of our definition of agency. However, cross-country differences exist in the degree of
control insurers can exert on tied agents.
Table 4.3: Nature of Restrictive Provisions
Application
France
Tied (i.e. “general”) agents
Germany
Tied agents
Italy
Tied agents
Netherlands
Tied agents
UK
Company agents
Spain
Tied agents
Nature
Exclusivity unless (a) insurer does not cover risk (b)
Tied (i.e. General) agents Exclusivity unless (a) insurer does not
client’s need not met by insurer’s product
Exclusivity unless insurer does not cover risk and there
is explicit agreement from insurer
Tied agents can not to cover risks that are not covered
by insurer
No standard model (tied agency is only about five per
cent of market)
No standard model
Exclusively tied agents can not to cover risks that are
not covered by insurer
Source: Europe Economics analysis of interviews
In France there are two notable exceptions to the prohibition of tied agents directing customers to
competing insurers. First, if an insurance company does not operate in a certain risk segment then the
agent is allowed, for that specific risk segment, to re-direct a customer to another company. Second, if a
customer is unsatisfied with all the offers proposed by a tied agent in relation to a specific product, the
agent can, as a last resort, re-direct the client to a similar product offered by a competing insurer. The view
expressed to us by both French agents and insurers is that this latter exception is motivated by the agents’
need to maintain a good reputation with their customers’ base.
Similar exceptions are present in Germany but the situations in which they apply appear more restrictive
than those in France. A German insurer noted that tied agents in Germany are allowed to re-direct their
customers to a competing insurer but only in relation to risk segments that are not covered by the insurer
with which the agent has a tie, and always with an explicitly approval of the insurer.
The Italian government passed a law in January 2007 regulating specific aspects of the contractual
relationship between insurers and agents. As noted previously, tied agents are the primary distribution
channel for non-life insurance products: due to concern that this might hinder competition, exclusivity
agreements between agents and insurers were abolished under the Bersani law.
However effective
economic control may differ from the legal position. For instance, by increasing the use of hard and soft
incentives (e.g. higher commission, provision of more comprehensive training and support, etc.) insurers
can still retain a high degree of control. Indeed some stakeholders indicated that commission levels are
increasing and remuneration structures changing in order to maintain control. The degree of control
exercised by insurers over tied agents appears to be strongest in Italy, alongside Spain, e.g. with little
evidence systematic re-direction of clients to competing insurers. On the other hand the new equilibrium
these changes are leading to is likely to be less stable than the one it replaces as it relies heavily on the
insurers’ ability to design competitive and well-structured — but costly — incentive mechanisms.
Similarly, we note a recent legislative proposal33 which would in fact allow for forms of cooperation of
between agents (if approved), which could significantly change the landscape. We discuss this further in
Section 5.
In the Netherlands there is no standard model concerning restrictive agreement as these are rather
decided on case-by-case basis (and it worth recalling that agency is relatively unimportant in the Dutch
33
Law Decree 24/10/2012 (“Decreto Sviluppo” bis).
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context). Dutch legislation enables agents to be tied to several insurers but only for different products
(thus single-tied remains the norm within certain product categories).
In Spain there are three separate degrees of exclusivity which are possible: agents may be single-tied, in
which case the re-direction of customers to a competing insurer is not allowed (even for products covering
risks different from the ones covered by the insurer with which the tie exist); multi-tied (but only for
insurers covering different risk segments — i.e. an aggregation of single ties; or they may have no ties with
a specific insurer.
Given the independent nature of brokers, it does not come as a surprise that agreements aimed at
fostering exclusivity relationships between insurers and brokers are virtually absent. Indeed in Germany an
exclusivity agreement between a broker and an insurer is explicitly forbidden by law. In the Netherlands
they would be in breach of the code of conduct set out by the trade union representing independent
intermediaries (Adfiz). In Spain, brokers and insurers can negotiate on an individual basis and specify
agreements through legal contracts which cannot, however, include exclusivity clauses or remuneration
arrangements. In the UK, brokers may engage in some from or restrictive agreement by using the so called
“restricted advice” model. Under this model, brokers can choose not to refer to the whole market (as this
form of advice can be prohibitively costly in some market segments). Instead they can refer clients to a
fixed panel of insurers and an agreed package of products. Any broker operating in this way has the
obligation to notify the client.
4.2.2 Pecuniary remuneration
Compensation of insurance intermediaries can take two main forms: it can be fee-based or commissionbased, where the former is paid directly by the client whereas the latter is paid by the insurer. More
specifically, remuneration structures can take the following forms:
 Service fees — are paid by the client and are more common for brokers, particularly those dealing in
commercial lines.
 Premium-based commissions — these are calculated on the total value of policies sold. They are paid
by the insurer to the intermediary. They currently represent the most common form of remuneration
and are widely used by both brokers and agents.
 Contingent commissions — these are conditional performance-related payments to the intermediary
paid by the insurer. They can be based on different performance measures:



Profit — conditional on the intermediaries’ portfolio being sufficiently profitable to the insurer.
Volume — conditional on a target sales-volume being reached.
Client retention — conditional on the renewal of an existing customer’s contract.
The use of contingent commissions for brokers has come under severe scrutiny following the Spitzer vs.
Marsh34 case in the United States. (In 2004, Eliot Spitzer, who was New York attorney general at the time,
accused Marsh & McLennan, the world’s largest brokerage firm, of steering clients to favoured insurers in
order to benefit from higher contingent commissions. This meant that the broker offered second best
products to customers, while still claiming to be working in their clients’ best interest.)
The draft IMD2 treats all commissions as equivalent, recognising only the concept of “variable
remuneration”. This would be prohibited for independent advisers (along with any remuneration from
third parties) and otherwise would be subject to mandatory disclosure. Such requirements would include
the disclosure of calculation criteria, targets and the amount of commission. The content of IMD2 is
discussed in more detail in Section 5, where we consider regulatory change more fully.
34
People of the State of New York v Marsh & McLennan Companies, Inc, and Marsh, Inc, No. 04403342.
http://www.ag.ny.gov/sites/default/files/pdfs/bureaus/antitrust/oct14a_04_attach1.pdf
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Contingent commissions are widely accepted and common for agents, e.g. in France and Italy, but are
becoming less common for brokers, largely due to regulatory change. As per 1st January 2013, all
commissions, i.e. premium-based and contingent, were banned in the United Kingdom for all investment
products, including those with a life insurance wrapper. In the Netherlands, a ban on commissions for
complex products has been imposed and both intermediaries and direct sellers will be subject to similar
rules.
4.2.3 Non-pecuniary remuneration and other support
The extent to which insurers provide their intermediaries with other incentives and support is naturally
related to the degree of independence of each kind of intermediary channel. Accordingly, direct sales
employees always receive the highest degree of support, followed by agents and then independent advisers
(i.e. brokers). This can take two forms: non-pecuniary incentives, such as trips awarded for meeting sales
targets, or soft incentives, such as IT or marketing support. We again discussed these issues with
stakeholders (insurers, brokers and agents) in all of the countries relevant to this study and we synthesise
the conclusions of this exercise below.
Table 4.4: Nature of Non-pecuniary Incentives and other Support Provided by Insurers
France
Germany
Italy
Netherlands
UK
Spain
Agents
Brokers
Hard incentives are becoming less common.
IT and marketing support can be provided.
Training on technical and regulatory matters,
which may be combined with the training of
Tied (i.e.
Very
General)
limited support
agents Exclusivity
offered
unless (a) insurer does not
directly employed staff of the insurers.
The level of soft incentives — and the extent
of the subsidy — is determined by the
insurer, and does vary
Marketing, IT and training support are
common-place as the insurer has legal
responsibility for the actions of the agents —
a restriction being that over-doing this can
Training support may be offered, but tends to
jeopardize agent status as a self-employed
be product-specific. IT support is not
worker.
common
Hard incentives (e.g. payments into
retirement plans) are also used (although the
ERGO scandal may also be having an impact)
Marketing and training support. IT and office
Very limited support offered
infrastructure provided can be extensive
Very limited outside of product-specific
In-house general training and support may be
marketing materials and product-specific
provided, but not subsidized, by the insurer.
training. Other soft incentives prohibited
Otherwise a prohibition of incentives is in
since 1st January 2012 (exception made for
effect
small-value gifts)
Marketing materials — typically productspecific — are provided. Training is rare.
Marketing and training support
More support — such as managing payroll
and business planning — may be provided to
the smallest brokers
Marketing, IT and training support are
provided. Training is less likely to be mixed
Support can be provided to brokers provided
with insurer staff.
that their independence is not compromised
Harder incentives (such as holidays) exist too
Source: Europe Economics analysis of interviews
The harder incentives — such as in France, Germany, Italy and Spain — are economic compensation
intended to provide the intermediary with sales and service incentives. This is restricted to agents.
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The softer incentives are important in the promotion of loyalty to the insurer. The provision of IT support
(e.g. claims management software) and office equipment bind the agent to a particular insurer. The degree
of such support will depend upon the insurer, the degree of competition for agents (i.e. the power relations
between the insurer and the agent) and, critically, the nature of the agent. A reduced level of support
might be offered to an entrepreneurial-style agent than would be offered to an employee-style one. The
entrepreneurial model is more common amongst multi-tied agents (and as such represents a bridge
towards switching towards being a brokerage) but is not otherwise related to the geographic market.
A common soft incentive provided by insurers is training. Training of agents focuses on technical
knowledge about the products as well as relevant market regulation and can count towards the training
requirements of the intermediaries. In contrast, training of brokers tends to product-specific.
A special case is that of the Netherlands, where soft incentives have been banned since 1 January 2012. A
€100 value limit is permitted for presents with any other non-monetary compensation needs specific
approval by the Financial Markets Authority (AFM). A Dutch broker intimated that at least one grey area
remains in that an insurer has a responsibility to ensure that advisers are well informed about their
products, so that some minimal product-specific marketing materials and even product-specific training is
provided to brokers.
4.2.4 Client ownership
Client ownership — in the sense of the on-going relationship with the client — is crucial to building
business value. That there is a very sharp distinction between brokers, agents and insurers in terms of who
owns in this commercial sense the relationship was widely confirmed to us by both intermediaries and
insurers interviewed in all of the countries of interest to thus study.
The norm is for insurers to seek control of the relationships with the client portfolios of tied agents. For
instance, in Germany, non-competition clauses are frequently used to provide portfolio protection. In
return, agents are entitled to indemnity compensation for the termination of the agency contract.35 Reality
may be less neat: to a greater or lesser extent the personal relationship between agent and client will
complicate such control.
In contrast brokers “own” their clients. Thus, insurers are expected to refrain from contacting those
clients directly as non-competition agreements are usually implicit. For example, in France, Les usages du
courtage are customs aimed at preventing insurers from taking clients from brokers by selling to them
directly.
This means that potential conflicts can arise in situations where insurers attempt to establish direct sales
channels operating in parallel to brokers’ networks. An instructive example comes from the Netherlands.
In absence of an insurer having a direct channel, the common practice would be for any insurer approached
directly by a customer (e.g. in relation to a policy renewal) would be to re-direct the client to the broker
who had originally sold the product. However, if a direct sales channel has been established, there is scope
for insurers to claim ownership for any client approaching them directly. To minimise the ensuing conflict
with brokers, ad hoc agreements between insurers and brokers have been adopted whereby some
compensation is made to the broker according to set formulae. This may be time limited (e.g. after five
years, the customer is taken to be exclusively “owned” by the insurer).
4.2.5 Profitability
A critical supply-side consideration is of course the profitability of the distribution channels. Profitability is
dynamic and heterogeneous — varying fundamentally between companies within a market as much as
35
Handelsgesetzbuch (German Commercial Code), Para. 90a.
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between countries. It follows that any cross-country comparison would likely not be meaningful, even
were data to be available.
On the narrower topic of distribution cost, remote direct and sales through price aggregators are
considered the cheapest channels, followed by tied agency, with brokers typically considered the most
expensive route. The data on commissions presented in Section 2 support these conclusions.
Market participants do not agree on a ranking of profitability: e.g. brokers may be expensive but can justify
the distribution cost through access to high premium customers, at least in some segments in some
countries. Direct selling has an apparent low distribution cost but can lead to lower retention and higher
marketing costs. Indeed even a simple ranking of channels in terms of overall profitability may not really be
meaningful – this is seen as fluid with insurers are in a phase of experimentation rather than in one of
consolidation on the most profitable models.
At a firm-level the available academic coverage is largely USA-based. Regarding the few international works
we note that Klumpes and Schuermannn (2011) found that firms in the life sector with exclusive
distribution systems were positively associated with cost and profit efficiency.36 However we note that
whilst the geographic coverage of this paper included France and the Netherlands — along with several
others — it excluded the remaining countries of interest to us.
Notwithstanding this reservation on scope, a noteworthy finding of this paper is that the emergence of
multi-channel strategies — mostly focused on larger firms — had enhanced firm performance. It is to this
topic that we now turn.
4.3 Multi-Channel Strategies
A multi-channel distribution strategy is one which involves the insurer selling the same product through
several — usually competing — distribution channels. The optimal mix chosen by insurers depends on
consumers’ demands and the cost implications of each sales channel. Traditionally specific product types
have been often been sold through a dominant single channel, but the trend amongst European insurers —
particularly the larger ones — is to move increasingly towards a multi-channel approach. The larger firms
have historically had the resources, particularly in IT investment, to do this effectively. The cost of largescale data manipulation has now reduced. A further refinement of this is to manage the sale and post-sale
business processes through more than one channel for a particular client (see the sub-section on strategic
value below).
Insurers are especially seeking to adopt a multi-channel approach in those countries where distribution
channels in the non-life segment are more diverse or fluid (e.g. countries where, over time, material
changes in the distribution channel mix are observable — one example in this respect would be Germany
where, over the last decade, agents have lost market shares to of brokers, and in the Netherlands: this
point being made by insurers from both countries). By contrast we did not have confirmation of non-life
insurers effectively pursuing a multi-channel approach in countries (e.g. France and Italy) where tied agents
are historically and still are to an overwhelming extent the dominant distribution channel.
Competition in the insurance market does not only exist only at the insurance undertaking level but also at
the level of distribution. In markets where a single model of distribution dominates the landscape insurers
aiming to operate across several channels are likely to face pressure from the dominant channel. One
example of this was offered by a French insurer: the strong bargaining power of local agents is one key
reason why the adoption multi-channel approach by French insurers is rather limited. Such obstacles are
likely to remain material in the immediate future as well since many French agents are currently merging
into larger agencies, likely further increasing their bargaining position.
36
P Klumpes and S Schuermann, 2011, “Corporate, Product and Distribution Strategies in the European Life
Insurance Industry”, Geneva Papers 36.
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The information gathered confirms that the economic rationale for a multi-channel strategy is two-fold:
 It is a means for insurers to mitigate their commercial risks.
 It adds strategic value to the products they offer.
4.3.1 Risk mitigation
Uncertainty in the general economic conditions, difficulties in forecasting the profitability of traditional and
newly emerging channels (e.g. price aggregators), regulatory risk, changes in the landscape of distribution
channels, and evolving consumer preferences, are all potential sources of uncertainty in the way distribution
may shape up in the future.
The choice to distribute through many channels is in part a reaction by insurers aiming to address such
uncertainty. Uncertain and difficult economic conditions often breed innovation. For instance, in Spain,
insurers have turned to this type of distribution strategy as a response to the current uncertainty
experienced by the Spanish economy. One Dutch broker indicated that, in the aftermath of the financial
crisis, consumers had lost confidence in the broker channel due to the negative perception they now have
of the financial sector as a whole. A Dutch insurer is setting up a direct remote distribution channel (to
operate in parallel to the network of brokers traditionally used) as this is expected to generate higher
profits in the long run (initial investment costs — especially advertising costs — limit short-run
profitability). A German insurer emphasised that some customers (especially in younger ones) are “last
minute” purchasers who attach value to the possibility of having immediate access to ready-made products
only when they need them.
4.3.2 Strategic value
Overall, the adoption of a multi-channel approach can be viewed as a “foot in many doors” strategy which
can mitigate (at least partially) the risks associated with the uncertain evolution of distribution channels in
the coming years.
At a trivial level it may be that a consumer may use more than medium to make a purchase, e.g. using a
price aggregator to search for market information but going directly to the insurer (or an agent) in order
to purchase the product.
We have already discussed the idea that consumers have heterogeneous preferences and that, when
considered through their entire lifetime (from purchase to claims management) even the more standardised
policies are multi-dimensional. For instance, a self-directed type of client may value the possibility of being
able to search the market and purchase the policy remotely on a price comparator website, whilst a
convenience-driven consumer will value the service, i.e. pre-sale advice, provided by an agent or broker
more. Consequently by selling the same products through different channels (each one offering a specific
comparative advantage) insurance companies can add value to their offers and broaden their reach.
One example of how value can be added by combining the features of different channels has been provided
by a German general insurer. This firm has developed a product combining two channels: a stripped-down
insurance policy that can be bought on-line and which does not include any additional service charges. In
the on-line transaction page, however, a client can opt for additional post-sale service at an extra cost. If
this option is chosen, the client is then directed to the geographically closest agent who can assist in any
subsequent claims management. If this option is not selected then there is greater clarity over where the
insurer’s responsibilities lie (previously customers of the stripped down policy had gravitated towards the
nearest agent if and when a claim arose).
Similarly, a multi-channel strategy can match up with attempts at segmentation of the market. A
fundamentally similar product can be sold direct using one brand — a Dutch insurer is targeting self-
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directed, price-conscious customers with one brand whilst an alternative brand focuses upon those
consumers seeking an increased advice element.
4.4 Conclusions: Trends in Distribution Choice
Price comparison websites reduce search costs for most consumers and hence reduce the value of those
distribution channels that focus upon performing this economic function. This means that brokers, where
they exist, can more easily be substituted — especially the smaller players or those that do not offer highquality advice. Aggregators have enabled self-directed consumers to fulfil more processes independently.
This is driving greater polarisation between a price focus (and the associated cost leadership strategies of
insurers) and a quality focus. This is clearest when comparing more standardised products (such as motor)
with more complex ones, but is not restricted to the former. Such polarisation can also be found within a
single firm, with discrete brands targeting price- or quality-conscious groups discretely.
These trends appear most strong in the Dutch and UK markets (particularly in non-life product areas, such
as motor insurance). They are much weaker in France, Italy and Spain, whilst Germany’s market falls
somewhat in between. In the life sector no-one has yet worked out an effective means of providing advice
on-line, restricting penetration.
The differential treatment of agents and brokers in terms of their incentivisation and governance by
insurers highlights that these can be viewed almost as two "mirroring" systems. This can be seen
graphically in the series of diagrams from Figure 3.1 to Figure 3.4 in the previous section.
Multi-channel strategies whereby the insurer sells a product through various distribution channels
simultaneously are becoming more common, and are no longer the domain of the largest insurers. The
economic rationale includes both a desire amongst insurers to mitigate uncertainty (e.g. difficulties in
forecasting the profitability of traditional and newly emerging channels, regulatory risk, changes in the
business landscape) and segmentation of the market due to differing consumer groups shopping in divergent
ways (again, this was pre-figured in Table 3.1).
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5 Regulatory Overview and Prospective
Change
5.1 Introduction
The goal of this section is to provide an overview of the key regulatory aspects concerning the sale and
distribution of products, and of the institutional arrangements shaping the interaction between government
and private players in the provision of insurance.
Insurance intermediation has traditionally been regulated at the country level. However, European Union
Member States must now ensure their national regulation complies with the Insurance Mediation Directive
(IMD), introduced in 2002 by the European Parliament and Council of the European Union, and currently
under review.
European Union Member States have transposed the IMD into national legislation, as with all EU directives.
They are able to ‘gold-plate’ the IMD as it is a minimum harmonisation measure (i.e. they are permitted to
make the rules stricter) but the basic framework is set at the EU level.
5.2 Regulatory Overview
This sub-section is mainly concerned with a review of the IMD as it represents the most significant
regulatory intervention directly affecting the sale of insurance products (in that intermediated selling is the
primary from of insurance distribution in Europe). However, consideration of whether the IMD has been
extended to cover direct selling explicitly and/or those requirements that apply specifically to direct sales
are also considered.
The IMD introduced minimum professional requirements for all insurance intermediaries across Europe
and requires them to be registered with a competent authority in their home Member State. It also
established the minimum information set that intermediaries must disclose to their clients before a sale is
concluded.
The IMD applies to all persons whose activity consists in providing insurance mediation services to third
parties for remuneration, which may be pecuniary or take some other form of agreed economic benefit
tied to performance. An insurance intermediary, according to the IMD, is “any natural or legal person who,
for remuneration, takes up or pursues insurance mediation”.37
All Member States had to be in compliance with the IMD by 15 January 2005, although the UK was the only
Member State to meet this deadline:38
 France transposed the IMD into national legislation in December 2005 with law no. 2005-1564 of 15
December 2005, which modified Book V of the Code des Assurances of 1976. Detailed provisions
were only published in 2006.
 Germany published in the Federal Gazette on 22 December 2006, which only came into force on 22
May 2007.
37
38
Directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002 on insurance mediation.
CRA International, Comparative Implementation of EU Directives — Insurance Mediation, May 2007.
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 Italy transposed the IMD into national legislation in September 2005 with the Insurance Code
(Legislative decree 209/2005), which overhauled Law 792/1984. The Code came into force on 1 January
2006, although the designated authority had another 24 months to adopt specific regulations.
 The Netherlands transposed the IMD into national legislation through the Wet financiële dienstverlening
(Wfd) of 12 May 2005, which entered into force on 1 January 2006.
 Spain implemented the IMD through Law no. 26 of 2006, the Ley de mediación de seguros y reaseguros
privados, on 17 July 2006, which effectively updated the existing Law no. 9 of 1992.
 The UK implemented the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment)
(No. 2) Order 2003, which came into force on 31 October 2004, followed by the Financial Services and
Markets Act 2000 (Exemption) (Amendment) (No. 2) Order 2003, which came into force on 14 January
2005.
Germany and the UK did not have any form of statutory regulation in place before the introduction of the
IMD. Consequently the IMD represents the key statutory regulation for these Member States. The others
— France, Italy, Spain, and the Netherlands — all had some form of prior statutory regulation. For these
Member States the IMD required an adaptation of or transposition over existing statutory regulation.
The IMD thus became the central regulation under which insurance intermediaries in Europe must conduct
their activities and is central to this analysis. However, some Member States imposed additional rules to
those required by the IMD and/or allowed exiting insurance intermediaries to continue their activities
without having to ‘re-qualify’ for their national register (referred to as ‘grandfathering’). The IMD must be
discussed within the greater context of national-level regulation, whether the latter was present before or
created after the former was introduced.
Table 5.1 summarises Member States’ implementation of the IMD, identifying the relevant national
legislations pre- and post-implementation of the IMD.
Table 5.1: Implementation of the IMD by Member State
Country
Legislation
pre-IMD
Legislation post-IMD
France
Yes
Law no 2005-1564 of 15 December 2005
Germany
No
Federal Gazette on 22 December 2006
Italy
Yes
Insurance Code (Legislative decree 209/2005)
Netherlands
Yes
Wet financiële dienstverlening (Wfd) of 12 May 2005
The Wfd was subsequently integrated into the
Wet op het financieel toezicht of 26 September
2006
Law no. 26 of 2006, the Ley de mediación de
seguros y reaseguros privados
Financial Services and Markets Act 2000 (Financial
Promotion) (Amendment) (No. 2) Order 2003
Financial Services and Markets Act 2000
(Exemption) (Amendment) (No. 2) Order 2003
Spain
Yes
United
Kingdom
No*
Enforcement
Detailed provisions were
only published in 2006
22 May 2007
1 January 2006, with
specific regulations coming
into force on 1 January
2007
1 January 2006
1 January 2007
17 July 2006
31 October 2004
14 January 2005
* The industry-led General Insurance Standards Council set voluntary standards and good practices for its 6,000 members.
Source: CRA International, Comparative Implementation of EU Directives (III) — Insurance Mediation, May 2007; BIPAR, Implementation of the
IMD by EU Member States — 9th Update, December 2006.
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5.3 Scope of Regulation
The IMD applies to insurance products sold through intermediaries. It takes an activity-based approach
rather than distinguishing between agents and brokers. Several types of persons or institutions, such as
agents, brokers and bancassurers can distribute insurance products and hence be covered by the IMD.39
Some countries have extended the IMD regulations to direct selling, while some have exempted certain
intermediaries depending on the type of products they sell, premiums they earn and/or affiliations they have
with insurance providers.
5.3.1 Direct selling
The Netherlands is the only country to have extended the scope of the IMD to include the direct selling of
insurance products as well. The UK had initially extended the scope to include direct selling, but
subsequently rolled back the scope to exclude direct selling in 2007. The rollback was in line with a new
approach by the UK’s FSA (as it then was) whereby the gold plating of directives would be avoided to avoid
excess cost to industry.40 Direct selling is however included in the scope of the FSA Handbook.
France, Germany and Spain, having applied the IMD through insurance-specific regulations, have not
extended the scope to direct selling.41 In Italy a subsequent and specific regulatory act ruled for the
extension of the main provisions contained in the directive to internet and telephone sellers.42
In France, the consumer protection rules in terms of professionalism and disclosure are essentially the
same for intermediaries and insurance providers, however direct writers are not officially included under
the scope of the IMD.
A multi-channel approach is generally adopted by direct writers, which allows clients to access to their
insurance products through multiple distribution channels.43
For all countries, direct writers and their employees are covered by existing EU Insurance Directives on
insurance that provide some information obligations, however consumers rights’ are not equivalent to
those provided by the IMD. For example, the Directives do not require the employees of direct writers to
disclose their status or to state in writing the reasons behind the advice given to the client concerning any
insurance product.44
5.3.2 Bancassurance
Bancassurance is included under the scope of the IMD. We note that:
 Bancassurance is highly developed in France, especially for life-insurance. Bancassurance channels may
be registered as either brokers or agents.45 French banks fall under the definition of insurance
companies. If an intermediary were an employee of a bank, he or she would be prohibited from selling
insurance as an independent broker under the rules implementing the IMD. In order to allow
employees selling insurance on their behalf to register as brokers instead of employees, banks have
created “societés de courtiers” (brokerage companies) which employ the (bank’s) brokers.
39
40
41
42
43
44
45
http://ec.europa.eu/internal_market/insurance/mediation_en.htm
http://ec.europa.eu/internal_market/insurance/docs/mediation/imd_final_en.pdf
CRA International, Comparative Implementation of EU Directives (III) – Insurance Mediation, May 2007.
ISVAP, Regolamento Isvap n. 34/2010 recante disposizioni in materia di promozione e collocamento a distanza di
contratti di assicurazione.
http://ec.europa.eu/internal_market/insurance/docs/mediation/imd_final_en.pdf
BIPAR’s response to the European Commission’s Consultation document on the Review of the Insurance
Mediation Directive (IMD), February 2011.
http://ec.europa.eu/internal_market/insurance/docs/mediation/imd_final_en.pdf
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 Banks in Germany may operate either as a broker or as a tied agent when selling insurance products.
Within banks only one person needs to be registered as an insurance intermediary with the IHK. There
is no obligation for all employees of the bank selling insurance products to be registered.46
 Bancassurance makes up less than five per cent of insurance distribution in the UK.47
5.3.3 Exemptions and other extensions
The IMD does exempt certain insurance products, e.g. relating to motor warranties and travel insurance
cover. In addition to these exemptions, Member States have exempted certain intermediaries and/or
products from registration and/or regulation. Other Member States have decided to increase the scope of
the IMD to include the intermediaries and/or products it excludes.
 Germany exempts certain intermediaries selling commercial credit insurance and those selling insurance
ancillary to their main profession (e.g. insurance sold at point of sale at a motor dealer), subject to
meeting certain product and professional requirements. Moreover, tied agents are exempt from
authorisation if they are competent and the insurance company who employs them assumes full liability
for their actions. The exemption does not apply if they carry out activities in other Member States.
Given the importance of agents in Germany, this can be seen as a significant deviation from IMD.
 The Netherlands exempts intermediaries whose main profession is not insurance intermediation, whose
insurance contract is not life insurance and does not cover liability risks, whose contract is
complementary to the provision of goods and services (e.g. travel insurance) and whose annual premium
income is below €500. The latter condition obviously severely restricts the application of this
exemption in practice. Intermediaries whose activities are limited to claims brokerage or the collection
of premiums are also exempt. Other exemptions by product type apply, e.g. horse and livestock
insurance, glass insurance (except greenhouse glass).
 UK regulations include all forms of motor warranties, despite these being excluded in the IMD, as these
fall under the scope of the FSA. Intermediaries whose activities are limited to introduction are exempt
from the regulations.48
 Italy, in January 2007, passed a law regulating specific aspects concerning the contractual relationship
between insurers and agents.49 As noted previously, tied agents are the primary distribution channel for
non-life insurance products in Italy: due to concerns that this might hinder competition, exclusivity
agreements between agents and insurers were formally abolished under the Bersani law.
5.3.4 Licensing conditions
The IMD requires all insurance (and reinsurance) intermediaries to be registered with a specifically
designated competent authority in their respective jurisdictions.
In all Member States but France, the regulatory authority for the insurance sector is the same as the agency
entrusted with registration. The UK and the Netherlands delegated regulatory and registration
responsibilities to their existing financial services authorities — the UK’s FSA (now FCA) and the Dutch
AFM — which regulate all financial services and products in their respective markets.
Other Member States designated regulatory and registration responsibilities to authorities specific to the
insurance sector — the Instituto per la Vigilanza sulle Assicurazioni Private e di Interesse Collettivo (ISVAP) in
46
47
48
49
http://ec.europa.eu/internal_market/insurance/docs/mediation/imd_final_en.pdf
http://ec.europa.eu/internal_market/insurance/docs/mediation/imd_final_en.pdf
CRA International, Comparative Implementation of EU Directives (III) – Insurance Mediation, May 2007.
Law decree no. 7 of 31 January 2007 (the “Bersani law”), converted to law no. 40 on 2 April 2007.
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Italy and the Dirección General de Seguros y Fondos the Pensiones (DGSFP) in Spain. Germany devolved
competence to the local Chambers of Industry and Commerce, supervised by the Federal Länder.50
France originally designated regulatory competence to the Autorité de contrôle des assurances et des mutuelles
(ACAM), while the Organisme pour le Registre des Intermédiaires en Assurance (ORIAS) was entrusted with
registration. In March 2010, ACAM’s authority was re-designated to a newly formed Autorité de contrôle
prudentiel (ACP),being a merger between ACAM and two accreditation authorities of insurance and banking
— the Comité des entreprises d’assurance and the Comité des établissements de crédit et des entreprises
d’investissement, respectively.51 The ACP is backed by the Banque de France. Intermediaries and banks are
therefore regulated jointly — understandable in principle given the prominence of bancassurance in France.
Registration remains with ORIAS.
In the UK and the Netherlands, the appointed regulator is in charge of regulating the whole of the financial
services sector, while other countries have appointed regulators specific to the insurance sector. In the
UK, an explicit aim for consistency of regulation has also resulted in insurance intermediaries having to
abide by rules applicable to the rest of the financial services sector, which have been argued to be more
burdensome.52 For example, insurance intermediaries were brought within the Financial Ombudsman
Service, which settles disputes between consumers and UK-based financial services providers.
Below we summarise the relevant Member States’ competent authorities for purposes of registration
before and after the implementation of the IMD.
Table 5.2: Registration Authorities pre- and post-IMD
Country
Registration pre-IMD
France
Yes; Autorité de contrôle prudentiel (ACP)
Germany
No
Italy
Yes
Netherlands
Yes
Spain
Yes for brokers
United
Kingdom
No for agents; agents registered with their
insurance provider(s)
No; voluntary registration with the General
Insurance Standards Council (GISC)
Registration post-IMD
Organisme pour le Registre des Intermédiaires en
Assurance (ORIAS)
Local Chambers of Industry and Commerce
Instituto per la Vigilanza sulle Assicurazioni Private
e di Interesse Collettivo (ISVAP)
Authority Financial Markets (AFM)
Dirección General de Seguros y Fondos de
Pensiones (DGSFP)
Financial Services Authority (FSA)
Source: CRA International, Comparative Implementation of EU Directives (III) – Insurance Mediation, May 2007; BIPAR, Implementation of the IMD
by EU Member States – 9th Update, December 2006.
The cost of registration varies significantly by Member State. Spain offers by far the cheapest registration
procedure, with a one-off cost of €10-€60 for natural persons and €140 for legal persons. The United
Kingdom has the most expensive registration procedures.53
Table 5.3: Registration Costs by Member States
Country
France
Germany
Italy
Netherlands
50
51
52
53
Natural Persons
€50 annually
Estimated range of €50-€100
€100 annually for persons*
€500 annually for firms
€10,000 annually for banks, post offices and financial promoters
€240 plus €300 per member of the executive board of the intermediary
€420 (self-employed) to €14,780 (>200 employees) annually
CRA International, Comparative Implementation of EU Directives (III) – Insurance Mediation, May 2007.
http://www.acp.banque-france.fr
CRA International, Comparative Implementation of EU Directives (III) – Insurance Mediation, May 2007.
BIPAR, Implementation of the IMD by EU Member States – 9th Update, December 2006.
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Country
Spain
United Kingdom
Natural Persons
€11 one-off for exclusive agents (natural persons)
€63 one-off for tied agents, insurance and reinsurance brokers (natural persons)
€147 one-off for insurance brokers, reinsurance brokers and bancassurance operators (legal
persons)
£1,500 one-off application fee for new firms
£400 to £29,100 annually according to firm turnover
An additional £6 to £496 annually according to firm turnover (FSCS general levy)
An additional £50 annually per firm, £360 per personal lines and £475 per commercial
customer complaint (Financial Ombudsman Service)
* Brokers pay an additional 0.50 per cent of annual commissions to a guarantee fund.
Source: CRA International, Comparative Implementation of EU Directives (III) – Insurance Mediation, May 2007; BIPAR, Implementation of the IMD
by EU Member States – 9th Update, December 2006; DGSFP, Boletín Oficial del Estado N.55, March 2011.
In order to register with the relevant competent authority, intermediaries must fulfil a series of professional
requirements, or licensing conditions. These conditions must be met in order for the intermediary to be
authorised to sell insurance products. The IMD requirements relate to competence, good repute,
professional indemnity cover and financial capacity of insurance intermediaries. Some Member States have
included rules stricter than those in the IMD and most have introduced some element of grandfathering,
whereby intermediaries who were active prior to the implementation of the IMD were automatically listed
in the future registry with little or no additional qualifications necessary.
All Member States implemented the IMD conditions with some minimal adjustments. However the UK and
France both included additional, stricter rules:
 In the UK, the additional rules contain detailed requirements on product disclosure (e.g. policy
summary, price, cancellation policies) for personal customers, provisions relating to unfair inducements
and excessive charges and provisions concerning handling of claims. General insurance intermediaries
were brought within the scope of the Financial Ombudsman Service, and all companies must pay a levy
to the Financial Services Compensation Scheme (FSCS).54 The UK has also gold-plated the IMD
requirements concerning professional indemnity (PI) insurance. According to the IMD, intermediaries
must hold PI insurance covering €1m for each claim and €1.5m in aggregate across the entire European
Union. The UK requires intermediaries to hold the IMD figures or a minimum of 10 per cent of their
annual income — whichever is greater. An upper limit was set at £10m, with additional restrictions on
the maximum excess permitted.
 France also gold-plated PII requirements, but to a much smaller extent. French requirements raise these
figures to €1.5 per claim and €2m in aggregate across the entire European Economic Area.55,56
In addition to gold-plating, some Member States allowed existing insurance intermediaries to continue their
activities without having to re-qualify for their national register. This action is referred to as
‘grandfathering’. All Member States but the UK adopted some form of ‘grandfathering’, even if a prior
register did not exist.
 Brokers in France who were already registered on the prior list with the ALCA were automatically
registered with the new ORIAS, subject to payment of the yearly registration fees. Intermediaries who
were active for the two years preceding January 2007 were automatically included in the register
without the obligation of obtaining a diploma. The ALCA list was a list of brokers only. Agents are now
registered with ORIAS through their insurance providers, subject to payment of yearly registration fees.
 Despite a lack of a register prior to the IMD, intermediaries in Germany who had been actively
employed since August 2000 were not required to pass an examination if they registered before 2009.
54
55
56
BIPAR, Implementation of the IMD by EU Member States – 9th Update, December 2006, p71.
CRA International, Comparative Implementation of EU Directives (III) — Insurance Mediation, May 2007.
BIPAR, Implementation of the IMD by EU Member States — 9th Update, December 2006.
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Intermediaries who had passed the Versicherungsfachmann/-fachfrau, an existing insurance vocational
training examination, were treated as qualified.
 In Italy, all agents and brokers working actively were automatically included in the new register.
 In Spain, grandfathering was permitted for brokers who were already active when the IMD came into
force.
 In the Netherlands, intermediaries already active in the market who met certain conditions benefited
from an exemption scheme.
 Grandfathering was not permitted for these intermediaries in the UK, including for the 6,000
intermediaries — roughly one-third of the then market — who were voluntarily registered with the
GISC.57,58
5.3.5 Information disclosure
Information disclosure refers to the type of information that the intermediary must disclose to the client
when conducting a sale, prior to concluding the contract. For example, intermediaries may be required to
disclose whether he or she is independent or whether he or she is tied to one or several insurance
providers. Similarly, intermediaries may be required to disclose any remuneration agreement he or she has
with the relevant insurance provider(s). For intermediated sales, this typically entails disclosing any third
party payment the intermediary receives (e.g. commissions paid by the insurance provider). For direct
sales, this entails disclosing the sale-man remuneration agreement the intermediary has with his or her
employer.
The IMD requires intermediaries to provide their names and addresses, registration details, whether they
have voting rights or capital in a given insurance company and information concerning complaints and
disputes procedures. Additionally, the IMD requires intermediaries to disclose the nature of the advice
given, i.e. if it is based on a fair analysis or whether or not he/she is tied to one or more companies.
Germany, Italy, and the UK have, by and large, implemented the IMD directly while France, Spain and the
Netherlands have adopted some ‘gold-plating’ in this area.
 France has required brokers to disclose their remuneration when the annual premium exceeds €20,000
at the policyholder’s request and only for professional and corporate risks. Additionally, all information
must be provided in writing or another durable medium.
 Spain adopted the IMD directly — however the rules vary depending on intermediary type. Exclusive
agents must specifically disclose that they are tied to one insurance provider; multi-tied agents must
specifically disclose they are tied to several insurance providers; and brokers must specifically disclose
they give advice based on fair analysis. This departs from the IMD, in that the latter only requires the
intermediary to disclose whether or not his/her advice is fair or whether or not he is under contractual
obligation with one or more providers.
 The Netherlands requires an intermediary to disclose how he/she is remunerated, i.e. fee or
commission and, for certain complex products, the amount of commission and bonuses.59 From 1
January 2012, bonuses and sales-based commissions for authorised agents have been banned as these
have been deemed not in the interest of consumers.60
The IMD also requires that the intermediary specify the customer’s needs and advice given to that
customer prior to the conclusion of that product.
57
58
59
60
CRA International, Comparative Implementation of EU Directives (III) — Insurance Mediation, May 2007.
BIPAR, Implementation of the IMD by EU Member States — 9th Update, December 2006.
BIPAR, Implementation of the IMD by EU Member States – 9th Update, December 2006.
http://www.afm.nl/nl/professionals/regelgeving/thema/provisieharmonisatie/beloningsnorm.aspx
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 Italy requires intermediaries to sell the policy most appropriate for that customer and have included
more detailed rules on conflicts of interest.
 The Netherlands additionally requires intermediaries to keep a written record of his service and general
information about his customers, including financial position, knowledge, demands/needs and attitude
towards risk.61
Authorities in France, Italy and the UK have created templates, advice sheets, and/or questionnaires to help
companies implement and satisfy these disclosure requirements. However, in Germany, Spain and the
Netherlands, the responsibility has been taken on by the insurance companies, private service providers
and/or associations. In the Netherlands, the two national intermediaries associations have organised
workshops to help members comply with the rules concerning customer information — a number of
intermediaries had expressed difficulty in complying as no specific standards were given.62
5.3.6 Impact of the IMD on market structure
The on-going impact of the IMD was largest in the Netherlands and the UK. These are the countries
where the gold-plating of the regulation was greatest and — more importantly — where the pre-existing
independent sector was largest. The implementation of the IMD had a significant impact in the Netherlands
because it introduced mandatory rules for all financial services providers. This meant that smaller and/or
older intermediaries — 30 to 35 per cent of the market by number— did not apply for or would not have
been able to obtain a licence. Indeed the AFM reported increased concentration in the market and
increased sales of portfolios among insurance intermediaries. In the UK the larger brokerage firms
benefited due to being able to fund more structured compliance departments. The new regime
contributed to the exit of smaller intermediaries and to the merger of several portfolios.63
5.4 Regulatory Change
Financial services has historically been highly regulated and the current crisis has heightened political and
supervisory attention upon all aspects of the sector — regardless of the role of any given sector in the
crisis or the impact of the crisis on that sector. In this section we consider the scope for regulatory-driven
changes in distribution in the European insurance market due to the new Insurance Mediation Directive
(IMD2), as it is currently drafted. We then consider certain national initiatives and their potential
consequences. We conclude by presenting our views of what future regulatory might seek to do.
5.5 IMD2
The European Commission published its proposed text for IMD2 on 3 July 2012. The current expectation
is that formal adoption of — a no doubt revised — text in 2013 with the Directive coming into effect
perhaps in 2015.
5.5.1 Scope of IMD2
The current draft of IMD2 extends the scope of its predecessor: it would now apply to all insurance
intermediaries (including at point-of-sale, such as car rentals) and direct sales by insurance firms.
IMD2 claims adherence to the principle “simpler products, simpler rules”. Organisations or persons
providing insurance advice as an ancillary activity to their business, or the mere provision of information
without the intention of signing a contract were excluded from the IMD and would now fall under the
61
62
63
BIPAR, Implementation of the IMD by EU Member States – 9th Update, December 2006.
BIPAR, Implementation of the IMD by EU Member States – 9th Update, December 2006.
CRA International, Comparative Implementation of EU Directives (III) – Insurance Mediation, May 2007.
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scope of IMD2 but are at times differentiated. For instance, according to Article 4, intermediaries
conducting mediation as an ancillary service to their primary business need not meet the Directive’s
registration requirements.
Article 2 of IMD2 updates the definition of insurance mediation, and by broadening the scope of this, price
comparator sites are expected to fall under its scope:
“'insurance mediation' means the activities of advising on, proposing or carrying out other
work preparatory to the conclusion of contracts of insurance, concluding such contracts, or
assisting in the administration and performance of such contracts, in particular in the event of a
claim, and the activity of professional management of claims and loss adjusting. These activities
shall be considered to be insurance mediation also if carried on by an insurance undertaking
without the intervention of an insurance intermediary.”64
Indeed the introductory text to the Directive specifically includes websites as a type of intermediary:
“This Directive should apply to persons whose activity consists of the provision of information
on one or more contracts of insurance or reinsurance in response to criteria selected by the
customer whether via a website or other means, or the provision of a ranking of insurance or
reinsurance products or a discount on the price of a contract, when the customer is able to
directly conclude an insurance contract at the end of the process”65
By aligning its rules closer to those of MiFID, the EU-level requirements would be significantly raised in the
life insurance market. On the other hand, the proposal aims to impose “less burdensome registration and
professional qualification requirements on those selling simple insurance products.”66 It also imposes
different transparency requirements for non-life and life insurance products.
The IMD2 retains the status of a “minimum harmonisation legal instrument”,67 leaving room for Member
States to implement additional requirements and conditions.
5.5.2 Key provisions
Variable remuneration (such as target- or achievement-based commissions) would be subject to a
mandatory disclosure requirement. The revised Directive redefines ‘remuneration’ to include both
monetary and non-monetary benefits, the latter referred to as “economic benefits of any kind”.68 As
drafted these provisions would also apply to any variable remuneration of the employees of insurers.
The new Directive differentiates between requirements for life insurance and non-life insurance products.
In the case of the former, full pre-sale disclosure of the structure and level of variable remuneration would
be mandatory from the day the Directive is implemented. For non-life products, a transitional period of
five years is given during which pre-sale disclosure is not obligatory, but customers are to be informed that
they have the right to request such information (which is to be provided upon request). After the
transitional period, full disclosure would apply to both product segments.
In particular, the Directive would require that before finalising any contract, intermediaries or direct sellers
inform the client:
64
65
66
67
68
European Commission (2012) “Proposal for a Directive of the European Parliament to the Council on insurance
mediation” 2012/0175 (COD) Article 2
European Commission (2012) “Proposal for a Directive of the European Parliament to the Council on insurance
mediation” 2012/0175 (COD)
Ibid.
Ibid.
European Commission (2012) “Proposal for a Directive of the European Parliament to the Council on insurance
mediation” 2012/0175 (COD) Article 2
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 whether they are representing the customer or if they are acting for and on behalf of an insurance firm,
 if there is a contractual obligation to conduct mediation business for one insurance undertaking
exclusively,
 whether they provide advice about the products they sell,
 the structure (i.e. fee, commission, or a combination of these) and level of remuneration received for
the contract, and whether it is included in the premium or is to be paid directly by the client,
 in the case of contingent commissions, the calculation criteria, that is targets or thresholds on which the
commission is based and the amount of remuneration to be received by the intermediary once those
targets are achieved, have to be disclosed, and
 to inform clients that any bundled products are available separately.69
5.6 Our Expectations of IMD2’s Impact on Distribution Channel Choice
The Commission itself has estimated that about 841,000 firms will be directly affected by the changes to the
IMD. Firms selling life insurance products are expected to experience a larger burden than undertakings
only active in the non-life segment. Below we discuss two key aspects of IMD2 and how we expect it to
impact upon the choice of distribution channels: the mandatory disclosure of remuneration and the
prohibition of third-party payments to independent intermediaries in terms of the sale of investment
products. Our focus is upon the impact of these measures on the relative attractiveness of different
distribution channels relative to the current position.
5.6.1 Mandatory disclosure of variable remuneration
Remuneration disclosure has long been a popular measure with consumer groups and regulators. Whilst it
has attractions it also brings a measure of cost. We only discuss here the possible implications of its
application to the insurance arena.
One concern is that certain consumers can become confused or focus unduly on detailed commission
disclosures as the key basis of price competition (i.e. buying products with lower commissions, even if the
overall product is more expensive or less suitable). We can provide a sense of quantitative scale for this
effect based on work done by the US Federal Trade Commission (FTC) in 2004. This involved a controlled
experiment with commission disclosure on mortgages with the key result that the compensation
disclosures had a significant adverse impact on the respondents’ perception of loan costs and on
respondents’ choice of loans. In the experiment, a group of recent mortgage borrowers were asked to
compare two loans and state which was cheaper and which they would choose. The question was posed
twice — once with the brokered loan less expensive than the other and again when equivalent. In the
experimental group one loan disclosed commission due to the intermediary (payable by the lender), the
other was treated as a direct sale. In the control group, there was no disclosure.
Without broker commission disclosure about 90 per cent consumers could identify the less expensive loan
(of the choice of two) compared to 63-72 per cent with such disclosure (different groups were presented
with the disclosure in different designs being considered by the FTC). The experimenters deduced that
disclosure was hence directly driving a degree of consumer detriment.
When the loans had equivalent costs, without broker commission disclosure about 95-99 per cent of
consumers could identify that loans were of equal cost (there were two control groups) compared to 4957 per cent with such disclosure. In terms of the choice between the products, 78-83 per cent in the
control groups would choose either. This reduced to 25-30 per cent with disclosure — further, 45-54 per
69
Note that the tying of insurance products is prohibited.
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cent would have chosen the loan without the commission element within a disclosure regime. This implies
some consumer bias against the intermediary channel — at least when its costs are apparent.
Obviously, great care is required in transposing lessons from this experiment to the insurance arena. First,
experiments in a laboratory are not reality. Second, there are evident differences in context. However,
we consider that the upshot for distribution channel choice is clear: disclosure can cause a substantial bias
against intermediary channels — this would apply equally to brokers and agents. Even if directly-employed
salesmen would be required to disclose any variable remuneration in their mix, such a bias is likely to
remain simply because the variable element is greater with an intermediary than with an employee. Indeed,
the EC’s Impact Assessment recognises that the requirement on remuneration disclosure may lead to
consumers switching to direct channels, but it assumes that there would be no long-term effect. The
insights from behavioural finance that we describe above imply that longer-term structural consequences
are in fact likely — absent some other compensating change.
The likely difficulties of explaining incentive structures may encourage moves to simpler approaches to
avoid deterring customers (this may be particularly true in the case of certain forms of “hard” incentive,
such as holidays). This may reduce the alignment of incentives (assuming that the current schemes are
well-designed) between insurers and intermediaries.
A further consequence is that telephone-based selling may become more difficult: discussing a complex
remuneration structure on the telephone is a different proposition for a consumer than being able to see
that structure in text (whether on-screen or on a piece of paper matters less if at all). At the least, we
believe that remuneration structures would be likely to simplify here.
5.6.2 Treatment of independent intermediaries
The prohibition of commissions (or any form of third-party remuneration) for independent intermediaries
involved in the sale of investment products mirrors the EC’s initial draft of its MiFID 2 proposals.
The EC’s proposals target independent advice only and we believe that there is a significant possibility that
insurance intermediaries with a remuneration structure geared towards third-party pay would simply cease
to self-describe as being independent, regardless of the coverage of the market within their typical search
— at least as an interim measure. Such a switch is largely anticipated within the EC’s own Impact
Assessment on the IMD2. This is largely because a direct transition from existing business models to a feebased advice may be perceived as difficult to achieve — and the associated costs and disruption may not be
necessary as the firm could assess its alternatives. We note that it had taken 10 years to prepare the UK
for the RDR, and that this change was still costly.
Even so we would anticipate a likely switching effect away by customers from advisers that switch from a
commission-basis to a fee-basis, with direct or agency sales by insurers (notwithstanding any disclosure
requirements) and banks being the likeliest beneficiaries. This switching effect could have an adverse impact
on customer choice — however, its scale is critically dependent upon the extent to which consumers value
(and are therefore willing to pay for) “independent advice” against, say, “advice”. In other words, it is not
enough as an impartial observer to recognise that the former is better — customers must share this insight
also. If this is the case, any secular trend towards independent advice (in the sense of not being restricted
in market choice and also having a remuneration structure geared exclusively towards downstream
remuneration) would be considerably strengthened. This would benefit consumer choice and the quality of
service received. If it is not valued highly by consumers, then — regardless of its worth to them — the
availability of such advice could be restricted.
Such a transition to upfront fees would be a non-trivial exercise. A recent study included an on-line
experiment with 6,000 subjects in eight EU Member States exploring their willingness to pay up-front fees
for information and advice. Nearly one-third of participants responded in a way that was consistent with
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them being highly reluctant to pay up-front for advice.70 Whilst some of these are likely to be capable of
being argued round to a fee-based approach there is likely to be some fall-off. This is not to say that there
are not clear benefits from removing this potential source of conflict — particularly with respect to
investment-type insurance products — simply that it is not costless.
The UK and the Netherlands have implemented similar proposals. An observation made by independent
intermediaries in these countries — just prior to effective implementation — was that where they offered a
range of products beyond those where third-party remuneration was to be banned these intermediaries
were attempting to transition clients towards a fee-based approach in all product areas. The rationale
being that a mixed economy approach, with fees here but reliance on commissions there, would confuse —
and might even concern — customers.
5.6.3 Member State effects
Given — as we have noted earlier in this section — that the IMD was differentially implemented the
baseline for IMD2 will vary from Member State to Member State.
In terms of the countries considered here, there is a broad bifurcation between France, Germany, Italy and
Spain on the one hand, and the Netherlands and the UK on the other.
In the former group of countries transparency about remuneration and on potential conflicts of interest is
limited. In Germany, disclosure of the cost structure is largely limited to health insurance. An extension of
mandatory disclosure to all insurance products would be new. The broker channel — which has
undergone positive development from a low base over the past years — may find its future development
stunted by the prohibition on commissions: this was the expectation of German brokers interviewed.
Similarly a German insurer anticipated increased consolidation, but also increased sophistication, amongst
brokers as they — and agents — would find the new environment more challenging.
In France and Spain, brokers have disclosure obligations only on certain life products. As for Italy, IMD2’s
incremental impact on sales of life insurance investment products may be limited by the existing alignment
with the provisions contained within MiFID. A more substantial impact is expected on long-term life and
non-life products, where the current level of disclosure requirements is less detailed. Overall, a French
insurer thought that direct sales would benefit at the expense of intermediaries, with brokers obliged to
consolidate to remain competitive. A Spanish insurer similarly identified brokers as the likeliest channel to
lose share, particularly in non-life.
By contrast, distribution in the Netherlands and the UK is likely to be the least effected by the IMD2 per se.
Firstly, existing disclosure requirements are closer to those envisaged by the IMD2 in these countries
already. Secondly the transition to fee-only advice is more advanced than in the other countries and,
indeed, is more wide-ranging than envisaged by IMD2. Dutch brokers and insurers interviewed as part of
this study agreed with each other that, if enacted as drafted, IMD2 would reinforce trends already apparent
in the Netherlands (see below) with little additional impact on brokers.
5.7 National Regulatory Initiatives
Both the Netherlands and the UK are transitioning to downstream-only advice models. As per 1st January
2013, all third party commissions, i.e. premium-based and contingent, were prohibited (strictly they were
not be able to be retained by the intermediary) in the United Kingdom for all investment products,
including those with a life insurance wrapper. In the Netherlands, a ban on commissions for complex
products was imposed and intermediaries and direct sellers were subject to similar rules regarding the
requirements.
70
Decision Technology Limited, Consumer Decision-Making in Retail Investment Services: A Behavioural Economics
Perspective, Final Report, November 2010.
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As we have noted previously we have been informed by advisers in the Netherlands that they tend to
operate as a one stop shop, dealing with the customer’s needs across a mix of product areas. Brokers have
looked closely at the sustainability of a charging model that varies by product for the same customer. The
result is expected by these market participants to be a trend towards fee-based remuneration being
introduced more broadly: for example, charging clients a monthly fee that buys access to advice (the
experience so far of Dutch intermediaries interviewed as part of this study is that this is easier to
implement than by-the-hour charging). Moreover, a mandatory requirement on disclosure for life
insurance products and disclosure upon request from the client will now be compulsory for non-life
products. Even though the strict requirements are only be applicable to the life market, stakeholders
expect intermediaries selling both product types (especially to the same client) to use one model of
remuneration for both.
The FSA’s Retail Distribution Review (RDR), came into force on 1 January 2013, puts an end to contingent
commissions paid by insurers to brokers. Consequently, intermediaries will be paid by their clients through
fees. The RDR in the UK will also increase qualification requirements — indeed this is expected to have
greater consequences than the transition relating to remuneration, with substantial market exit predicted
(about 17 per cent firms according to the UK FSA’s own analysis). Direct channels are expected by UK
insurers and brokers to benefit — to a degree — as a consequence.
Italy is in the process of implementing a number of important structural reforms. Some of the proposed
legislation deals directly with the distribution of insurance products. In particular, intermediaries —
including tied agents — that distribute motor insurance policies will be required, prior to contract
signature, to inform the client about the prices and the contractual conditions proposed by at least three
different insurance companies. The proposed changes would impose higher compliance costs on single–
tied agents (who would incur — at the least — some additional search activity from which no extra
revenue can be generated) than multi-tied agents or brokers. In our view this might — all else being equal
—incentivise some singe-tied agents to switch to multi-tied or independent broker status. Since the
detailed implementation remains unclear this is necessarily tentative. In addition, IMD2 could re-frame this
choice, effectively making a switch to independence attractive only to the most sophisticated (or confident)
agents.
5.8 How Will Regulation Impact on Distribution in the Future?
We have noted above that there was a slow progression towards a blanket ban on third-party
remuneration in the UK and the Netherlands. The already well-established intermediary channel in these
countries is already undertaking voluntary market moves towards more fee-based models. Again a switch
to a fee-based market is widely expected — as noted at 5.6.2 above — to result in marked consolidation of
remaining brokerages, with a strong push to larger, higher quality intermediaries.71 Dutch, German and
other markets have already seen the average size of brokers increasing in the recent past. Whilst size
certainly does not automatically equate to improved quality it should allow increased specialisation in
particular product areas.
IMD2 is clear that aggregators should be treated as an intermediary (which appears to have been the
default choice made by national regulators anyway). Our analysis in Section 4 indicates that click-through
revenues are the most significant source of income to aggregators: in our view it is not clear that this
would or would not count as variable remuneration and hence be subject to mandatory disclosure. Where
brokers and aggregators are not significant channels — France, Italy and Spain — IMD2 may act as a further
brake to their development.
71
Similarly, in our earlier work on the potential impact of applying MiFID-style distribution and selling rules to PRIPS,
we noted that many market participants had the resultant intention of being increasingly selective about the quality of
the intermediaries utilised by them.
This 2010 Europe Economics study can be downloaded at
ec.europa.eu/internal_market/.../docs/.../prips/costs_benefits_study_en.pdf.
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IMD2 encourages — but does not require — advice: any future “IMD3” that changed this stance towards
such a requirement would further stunt remote direct and aggregator channels. Notwithstanding the EC’s
focus on regulation targeted at the support of vulnerable customers, in our opinion this does not currently
appear likely. It would, of course, be forcing an over-regulated and overly expensive level of service upon
everyone else.
5.9 Conclusions: Regulatory Change and the Make-up of Distribution
The market- and technology-driven trends that we have described in previous sections interact with a
changing regulatory environment. Indeed, there are a number of national and EC-level regulatory changes
that we expect to impact upon distribution channel choice.
The UK and the Netherlands are moving away from the third party remuneration of advisers, at least for
complex products. The already well-established independent intermediary channel in these countries was
already undertaking voluntary moves towards more fee-based models. Those independent intermediaries
who offer a range of products (i.e. including those where regulation is not changing) are striving to
transition clients towards a fee-based approach in all product areas. The rationale is that a mixed economy
approach, with fees here but reliance on commissions there, would confuse — even concern — customers.
The draft IMD2’s mandatory disclosure requirements may mean consumers rely less on intermediary
channels — this would apply equally to brokers and agents. Even if directly-employed salesmen would also
be required to disclose any variable remuneration in their payment, such a bias against intermediaries is
likely to remain simply because the variable pay element is likely greater with an intermediary than with an
employee. The difficulties of explaining incentive structures may encourage simpler approaches to avoid
deterring customers (this may be particularly true in the case of certain forms of “hard” incentive, such as
holidays). This may reduce the alignment of incentives (assuming that the current schemes are welldesigned) between insurers and intermediaries. A further consequence is that any residual telephone-based
selling may become more difficult: discussing a complex remuneration structure on the telephone is a
different proposition for a consumer than being able to see that structure in text (whether on-screen or on
a piece of paper). At the least, structures are likely to simplify.
In those markets where agency is predominant — such as non-life in France, Germany, Italy and Spain — in
our opinion there is likely to be a two-fold effect: first, some restructuring of the remuneration and
governance structure between the insurer and the agent, and second an increase in the appeal for a
market-disrupting move for an insurer focused upon internet-based direct sales. Whilst the latter is
potentially inhibited by the apparent current preference in these markets for face-to-face contact, this may
be tested in the future.
There may also be significant resistance from customers to fee-paying. Recent research found that nearly
one-third of participants responded in a way consistent with them being highly reluctant to pay up-front for
advice. Therefore an IMD2 requirement for independent insurance intermediaries in the sale of investment
products to transition from remuneration from third parties to downstream payment makes it likely that
some advisers will cease to be (or at least self-describe) as independent, with direct or agency sales by
insurers (notwithstanding any disclosure requirements) and banks being the likeliest beneficiaries.
Again a switch to a fee-basis is widely expected to result in marked consolidation of remaining brokerages,
with a push to larger intermediaries. Whilst size does not automatically equate to improved quality it
should allow increased specialisation in particular product areas. Currently independent intermediaries
may therefore be hit by both (a) price aggregators cannibalising customers and replacing part of their
economic value (search), and (b) regulatory action against existing third party, variable remuneration
models. Only the best quality advice givers will prosper in such an environment. In those markets where
brokers and price aggregators have least presence — i.e. retail markets in France, Italy and Spain — these
changes are likely to limit the further development of both brokers and price aggregators.
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