Appointed Representatives – Are Your Principals Holding You Back? 

The Appointed Representative/Principal business model in the UK has evolved considerably – in the last 12 months there have been over 60 insurance broker start-ups in the UK choosing this as the route to building their businesses.  It’s a good time to be an AR too – in our recent survey of appointed representatives, 74% of respondents rated their ability to compete against the wider market as high or very high, with 77% expected to grow their business this year. 

It is great to see the next generation of insurance brokers seizing the opportunity and filling the void created by the consolidation within the industry. However, while the AR model is a great route to success, it is essential that the choice of Principal is undertaken carefully. 

Principals and Their Appointed Representatives 

In 2016, the Financial Conduct Authority thematic review into Principals and Their Appointed Representatives in the General Insurance Sector highlighted shortcomings in some Principal firms: 

“the issues we identified were serious and widespread, and showed that over half of the Principal firms did not fully understand the risks arising from their ARs’ activities or were unable to demonstrate that they were complying with their obligations to control and oversee these activities.” 

The Principal is responsible for any regulatory shortcomings that might occur with their ARs and it is essential that they have in place an appropriate risk management framework to identify and manage the risks that the individual ARs present to their business and to their clients. 

There are 20,000 ARs in the UK*, around 500 of which are ‘broker ARs’, operating as small independent brokerages predominantly focussed on commercial clients.  Principal firms range from dedicated networks to national, regional, and small independent brokerages. For broker ARs, the choice of Principal becomes ever more important with the dual challenges arising from the pandemic and the hardening market.  

Challenges in 2021 

The FCA’s coronavirus financial resilience survey brings financial stability into sharp focus.  Across the 23,000 financial services firms surveyed (including 3,370 brokers and intermediaries), an estimated 20% have low financial resilience and are at heightened risk of failure.  Nearly half of brokers surveyed believe that coronavirus will have a negative impact on their business model. 

The pandemic and several other factors have impacted both the insurance and reinsurance markets, resulting in a hard market which can pose significant challenges.  In such circumstances, your Principal’s relationship with the insurance market and key carriers will be crucial as you navigate the challenges of a changing market and to enable you to benefit from the opportunities this provides. 

When it comes to Professional Indemnity cover, brokers now face similar conditions to those encountered by other professions with several key players withdrawing capacity in 2020.   Principal firms should provide a vital role in ensuring appointed representatives are adequately protected by providing appropriate PII cover. 

The Right Principal for You 

Are you being provided with the best opportunity to build your business or are there potential barriers? Some things to consider:  

• Does your Principal have strong insurance market relationships?  
• Do they provide appropriate Professional indemnity cover to protect your business? 
• Do they provide appropriate control and oversight of their AR’s activities? 
• Do you have a contract that clearly sets out the responsibilities of both parties? 
• Is the business financially stable, providing confidence that they will be able to fulfil their obligations to you and your clients? 

Although the answers to the above are not always evident there are things you can do to make sure you choose the right Principal: 

• Check the contract and take advice if necessary.  
• Talk to insurers, they will give you an insight into the relationship and capabilities of your Principal. 
• Ask your Principal for details of their agency base and key relationships. 
• Ask for details of their PI policy and make sure this protects you adequately. 
• Check Companies House and credit agencies or ask your accountants to carry out a check.  

Making the wrong choice of Principal could put your business in jeopardy and present a reputational risk from which it may be impossible to recover.  

Make sure your Principal enhances, not compromises your success. 

*According to the FCA, in 2016 there are approximately 400 insurers, 5,100 intermediaries who are directly authorised and over 20,000 appointed representatives. While many ARs provide insurance (home, motor, travel, GAP etc) in addition to their core business, a growing subsection of appointed representatives is the ‘broker AR’ – small independent brokerages focussing mainly on commercial and high net worth clients.  We estimate that there are there are around 500 broker AR’s; 60% belonging to an AR network and the remaining 40% are attached to national, regional and small independent brokerages.