Is intermediation ethical? This was a question put to me at a recent insurance event I was speaking at. It’s a good question; here are some thoughts on it.
It’s a good question to raise because it encourages people to stand back from their day-to-day activities and think about what they do from a wider perspective. And it’s a pretty fundamental question: it’s actually asking if some market structures are more ethical than others.
There’s a long history of intermediation in the insurance market. It’s been a source of much innovation, in terms of new covers, wider distribution and new services. And there’s been a lot of entrepreneurial spirit around it that has brought a great deal of energy to the market. And it’s still, despite other innovations like aggregators and direct writers, a dominant feature in both the general and long terms markets: think of all those brokers, adjusters, suppliers, financial planners and agents.
At the same time, it’s clear that the way in which intermediation has sometimes been managed has led to collossal levels of consumer detriment. Mis-sold products and mismanaged conflicts of interest litter the track record of intermediation in insurance.
So there’s very much two stories to be told about intermediation. How do they stack up?
If you think intermediation is inherently unsuitable for the sale and servicing of insurance products, what would be the alternative? The direct market has a fair share of its own ethical issues. If you got rid of intermediation, wouldn’t it be like jumping ‘from the frying pan into the fire’?
A clear and distinct ethical question can be asked about the level of intermediation. If a large number of brokers, agents and the like lie between the manufacturer and consumer of an insurance product, then one has to ask about the value they are adding into that chain, and the value they are extracting out of it.
Clearly, handling large complex risks on a global scale does involve a complicated array of intermediaries. However many risks are standard and straightforward, as are the claims that go with them. Excessive layers of intermediation for those latter risks just smack of ‘too many fingers in the pie’ and should be challenged.
The way in which claims for some lines of personal insurance are handled in the UK has been challenged, with motor insurance becoming a textbook example of excessive intermediation. The motor market thought for several years that it could handle the complexity it had sown into its claims operations, but has now come to realise that it resulted in them being labelled as dysfunctional and having an even more diminished level of consumer trust.
So I expect the UK regulator to become more interventionist in certain areas of intermediation, challenging firms to demonstrate that value is being added and not extracted. There will be a spotlight shone on both underwriting and claims, with the latter in particular needing to deliver a robust case for the myriad of intermediaries that everyday claims can attract.
Conflict of Interest: I’ve worked for an insurance broker and a schemes intermediary in the past, but then, I’ve also worked for one massive buyer of insurance whose CEO forbid any dealings with the broking market.