Join the club

Just when you thought it was safe to get on with advising clients another fly has hit the IFA's ointment. That is if they are dealing in general insurance. If pet insurance is not your thing, or if you are happy to let your clients use the 'little red phone' for their car insurance, this does not necessarily mean you are immune to the new General Insurance Standards Council (GISC) rules which will restrict your business activities.

The new rules will affect any adviser selling private medical insurance (PMI), hospital cash plans, dental and personal accident insurance, as well as mortgage payment protection insurance and waiver of premium. In the business market, keyman insurance, business interruption, employer's liability and goods in transit cover will also fall under the GISC umbrella.

There are many considerations for the intermediary to make, not least whether it is worth continuing doing business in the general insurance market.

The rules stem from the GISC, the independent body established to set, monitor and enforce standards in all areas of general insurance selling in the UK. Currently, codes of practice from the Association of British Insurers (ABI) and the Insurance Brokers Registration Council (IBRC) cover non-general insurance practitioners and the idea behind the formation of the GISC was to bring regulation of general insurance business under one regulatory regime.

Under the rules, which come into effect on 15 October 2001, intermediaries will only be able to do general insurance business with GISC members if the intermediary is also a member of the GISC. Intermediaries can do business after this date provided an application for membership is submitted. However, after 31 December 2001 intermediaries must be members if they want to do business with GISC members. So far 80 insurance companies have become GISC members and 463 IFAs.

The cost of membership to the GISC for intermediaries is 0.1% of annual net retained brokerage, commission or fee income from general insurance business. The minimum fee is £200 a year. If an adviser is taking income over £200,000 the membership fee will increase.

But membership is not just a question of subscription fees. There are also minimum finance and professional indemnity insurance stipulations, training requirements and customer practice codes to comply with, all of which will add to the costs and administration of doing business.

It should be noted, however, that if an intermediary is regulated by the FSA or IBRC, he or she is deemed to already meet the GISC's requirements for segregation of funds and solvency and professional indemnity cover.

Slipping through the net

One way for intermediaries to continue general insurance business without joining the GISC is to become an appointed agent of a member. The problem for an independent intermediary is that their unique position in the advisory market, of being able to trawl the entire range of products available for clients, will be compromised. The intermediary will only be able to be an appointed agent of one insurer for each product line. It is acceptable to use one product provider for PMI, for example, and another provider for MPPI, but no more than one provider for each which would give the adviser multi-tied agent status. However, if the chosen insurer offers the products of another insurer, this will categorise the adviser as an independent intermediary.

Introducing business

Another way of escaping GISC membership while continuing to carry out general insurance business is to operate as an introducer. The adviser can introduce clients to a GISC member, but must not then advise or sell to the client. This compromise position will minimise the adviser's link with the client. They will not be able to help with filling in forms or understanding the product. It will be harder, therefore, to ensure take-up of the product. And from the income point of view, commission levels tend to be lower.

Fortunately some moves are being made to make membership of the GISC more acceptable for intermediaries who only carry out a small amount of general insurance business. The Association of Independent Financial Advisers (AIFA) is in talks with the GISC concerning membership fees for such IFAs.

AIFA's argument is that GISC membership is a duplication of regulation for intermediaries and at least a reduction in fees is in order.

'The situation is not completely clear,' says Fay Goddard, director of policy and technical services at AIFA. 'There are issues and we are in negotiation with the GISC over to make sure any dual regulation is sensible and necessary.

'Some IFAs who do not do mortgage business or PMI appear on the surface not to be caught by the GISC rules,' continues Goddard. 'The problem is with waiver of premium contracts attached to pensions.'

Many of these contracts not only provide cover in the event of accident and sickness, but also unemployment, which would fall under the GISC remit.

Paul Smee, director general of AIFA, has been quoted as saying, specifically regarding IFAs whose sole general insurance business is waiver of premium: 'I think the GISC will announce that it will not regulate this activity at all, so that people whose only general insurance business is selling waiver of premium contracts attached to pensions will not have to go near the GISC.'

Goddard emphasises AIFA's support of standards and rules for general insurance business, however. 'All we are saying is that it is nonsense to get all tied up in red tape. We are not trying to avoid regulation, we are just asking for something pragmatic and logical.'

Rachel Maidment, PR spokesperson at the GISC, confirms it is in talks with AIFA regarding the selling of unemployment cover in conjunction with FSA-regulated products, for example, in the case of a waiver of premium contract with unemployment cover being sold alongside a pension or life assurance product. If that is the only general insurance business an IFA carries out, membership will hardly be worthwhile. Maidment says: 'We do not believe it is sensible for an IFA to have to be a member of GISC for that small portion of their business.'

Currently, GISC will still assume regulatory responsibility for standalone waiver of premium products or where the waiver contract is underwritten by another insurer.

Decision time

All this considered, should IFAs join GISC, or should they quit the general insurance market?

One issue to consider is that this is probably not the time for intermediaries to be turning their backs on one source of income when another key source, for example pensions, may also be about to slip from their grasp. With the concessions in place and being discussed regarding waiver of premium, probably the biggest hit for intermediaries will be in the PMI market, which is clearly under the GISC's remit.

Claire Ginnelly, national account manager (intermediary sales division) at Standard Life Healthcare, says: 'PMI will become more important to IFAs to complete the financial package they are offering to clients and to supplement possible loss of income from areas such as pensions with the introduction of stakeholder.'

Going forward it will be essential for intermediaries to join GISC to sell PMI.

'Most specialist healthcare brokers are GISC members already,' says Ginnelly. 'For smaller IFAs and/or those writing one or two pieces of business membership is more of an issue. But, we are encouraging all IFAs to join GISC so that we can continue to have a relationship with them.'

The majority of PMI business, however, comes from specialist PMI brokers, with just a trickle of business coming from IFAs, according to Derry Andrews, managing director of Clinicare. 'The problem is not so much how much PMI an adviser is writing, but how much other general insurance they are writing,' says Andrews. 'I suspect many also do a trickle of motor, buildings and contents insurance, and the decision to join GISC will be based on the cumulative amount of all this general insurance business,' he says.

A lack of interest

Andrews is also less optimistic about more IFAs breaking into the PMI business. 'It seems obvious that they should be involved, but despite talk of the apparent erosion of traditional lines of business like pensions and life, there still seems to be the attitude that PMI is complicated and IFAs do not want to be involved.'

For those already committed to the PMI market, the response is generally positive. WPA has had no problem with the rule to join GISC. 'It is right to join GISC,' says David Ashdown, communications director at WPA. 'We immediately took it on board as did the majority of IFAs we deal with. They realise there must be this regulation.'

It may be a case of a little complication towards a simpler end, to bring regulation of general insurance under one body. For the individual intermediary, the balance will have to be between how much business they risk losing if they refuse to join GISC, or the potential loss of income by tying to one provider or taking the introducer route.

The real consideration needs to be applied by those intermediaries who carry out such small amounts of general insurance business that the need to meet the membership requirements outweigh the income they receive. The argument here could just be that it is not the level of fees they need to pay to GISC, but rather the level of business and, therefore, income they are doing in this area. Can they actually afford not to be doing more?