Legitimate Insurance Earnings or Embezzlement?

Recently, when purchasing a case of my favourite beer at the supermarket I had a mischievous urge to ask what their profit margin was on each can.  I figured that in the run up to Christmas, when there is consumer demand for booze, the supermarket must be earning a profit and selling it to me for a mark-up of at least 15% - which seems entirely reasonable. However I had bought the rather large case at a discounted price. If I bought only four cans, then theoretically their margin was in excess of 50%. This seemed less reasonable. I had a sudden sense of deja vue - those mark ups felt rather familiar.

When I began working in insurance, regulation didn’t exist as we recognise it today. It was quite normal for a freeholder to mark up the insurance product they purchased and pass it on at a higher price. After all, if you were a firm of builders you would always sell the materials you used on a project for more than you could buy them. If you had built a block of flats then it would make sense to apply the same principle to the insurance you were obliged to purchase under the lease. Today, landlord and tenant law gives lessees a right of inspection on insurance documents, which effectively prevents this practice.

Insurance intermediaries have historically earned their income from commission. This is a percentage of the premium before the application of insurance premium tax, currently running at 12%. It is commonplace to share some of that commission with the freeholder and there is case law to suggest that this is entirely appropriate if the insurance is purchased at arm’s length and the freeholder has an active involvement in the placing and administering of the policy. Sometimes managing agents earn commission for placing insurance and, if they are appropriately regulated for the distribution of insurance, it is perfectly reasonable they should be remunerated for this work.

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However, what is interesting here is how this remuneration is disclosed. This is where it becomes complicated. An insurance intermediary (which could include an appropriately regulated managing agent) must disclose their commission to the policyholder. That policyholder may decide not to disclose this income to the lessees, unless of course directed to by tribunal.

Some managing agents may elect to become company secretary, which effectively makes them the client. This is a loophole that avoids the need for insurance regulation. But what happens if they draw an insurance commission for their services?

The easiest way to consider this is to draw an analogy and to assume that if they were taking a hidden skim from a contractor that would be embezzlement. Is it any different if you call this insurance commission? Acting as company secretary, they could be transparent about these earnings but by doing so they would fall foul of insurance regulations. Receiving an income by performing an insurance function without regulation is a criminal act. It is the managing agent (with a company secretary’s hat on) and not the client who is being remunerated. So by not disclosing the income they are earning via the insurance commission, agents are effectively embezzling company monies.

Confused? Maybe it is time to drink that beer I purchased at an apparently reasonable mark-up.

Paul Robertson, Managing Director at Midway Insurance Services Limited

 

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