London market insurance and reinsurance brokers' fees and commissions are unsustainable and their cost model "will be challenged and changed," according to Ed Broking Group Ltd. CEO Steve Hearn.
Speaking about the future of broking Nov. 7 at Lloyd's of London, Hearn said the total cost of doing business in the London insurance market, including broker commissions, is 42% of premium. He said reinsurance brokers on average charge 30%, a figure that compares unfavorably to intermediaries such as Mastercard, which charges 1.3% for credit card transactions. Real estate agents' fees on house sales are between 0.7% and 3%, and online retailer Amazon.com Inc.'s fees are between 12% and 15%, he added.
According to Lloyd's of London's first-half 2018 earnings, acquisition expenses across the market were 26.6% of net earned premium in the period, and costs overall, including administrative expenses, were 39.3% of net earned premium.
Time for change
Ed Broking, which operates in the Lloyd's and wider London markets as an international wholesale insurance and reinsurance broker, is in the process of being acquired by brokerage and fintech company BGC Partners Inc. Ed will join fellow Lloyd's broker Besso Insurance Group Ltd. in BGC's new insurance division, which Hearn will run after the Ed acquisition closes in 2019.
Hearn said Ed had been an advocate of reducing broker commission rates, but noted that brokers would need to cut their own operating costs to afford this.
"What I can't do is reduce commission for doing it the way we have done for 300 years — I'll just go out of business. If I can change the model, I can reduce the cost," he said.
To this end, Ed has introduced TradEd, which enables the company to obtain quotes from insurers electronically. He said six insurers, including Lloyd's insurers and "the biggest P&C insurer in the world," were using it.
Hearn said the whole London market needs to change to tackle the challenges it faces, which include falling market share in emerging economies as well as its high cost base. He said the industry had been "terrible" at change management, in part because it has ignored the need to make amends.
"We have struggled to get the white old men who run this part of the city to recognize it needs to change," he said.
He acknowledged recent work by the London Market Group, a collaboration between insurer and broker trade bodies and Lloyd's, to push for modernization. He said it was not too late, but added: "We've got to get momentum moving much, much quicker."
He also insisted that although the London insurance market has challenges, there is "more opportunity than threat" for its participants and brokers continue to be a vital part of the chain.