The European Commission published its proposed revisions to the Insurance Mediation Directive (IMD2) in July and has decided to support the compulsory disclosure of commission. This spells trouble as the change will take several years to fully implement and could mean that insurance companies, in particular, insurance brokers will be vulnerable.

As highlighted in a recent report there will be, for general insurance, a five-year delay after the directive is adopted. During this time an “on request” commission disclosure system will be in operation. Also during this period, the Commission has stated, the directive will be reviewed, considering the effect these disclosures will have on SMEs that applies to almost all independent brokers.

What this ‘disclosure’ means is that insurers will have to disclose any variable salary paid to direct staff for selling products but not regular salaries or other costs.

Brokers will mostly be affected by this change rather than direct writers as they are only required to declare variable salary paid to staff. Brokers on the other hand must disclose all earnings and costs. It is thought that mandatory disclosure of this sort will create an imbalance in the industry, reducing competition and producing higher prices and so SME insurers that rely on brokers are likely to take a hit as a result.

The Commission has not stated precisely what is meant by ‘remuneration’ as it includes any commission, fee, charge or other payment including any economic benefits.

A possible scenario for brokers in terms of mandatory disclosure in commercial insurance is that they will receive fewer earnings that translate to profit. Independent brokers receive commission that ranges from 35% to 15% according to the particular business focus. This commission averages at around 19% with brokers making only 15% profit.

The potential impact of it will need to be analysed and factored in to any price. Brokers in the mid-market or those in high-commission/low-cost servicing sectors will be vulnerable and will need to tackle costs and their process and service models.

These revisions look towards making it compulsory for all intermediaries to disclose any remuneration received and they will have a significant effect on insurer/intermediary relationships in the UK general insurance market.