With regard to the ongoing issue of the ubiquitous ‘engineering fees’, euphemism that it is, the idea at the present moment is that the industry will be self-regulated. General insurance companies will simply agree not to continue the practice of giving out excessive engineering fees to brokers and agents to win market share. Although I applaud the OJK and the AAUI for taking a hands-off approach and pursuing what may be termed as an inter-industrial agreement, in the case of engineering fees, stronger action must be taken: i.e. a deterrent. The OJK revealed at the recent Bali Rendez-Vous that it would hold off on issuing a POJK or SEOJK until the professional association had taken a stab at the long-running problem of over-payment of engineering fees to secure market share.
However, I can predict now that more than a pronouncement by the AAUI is needed because, by its very definition, the issue of engineering fees is a gray area. In theory and in practice, carriers have considerable latitude in paying out fees for surveys, advice and education, and to complicate matters, there are product side fees (to agents, brokers, surveyors, third party experts, etc.) as well as customer side fees (marketing, bonuses, promotional fees, etc.). Some even shrug off the danger of excessive acquisition fees, stating that as long as the RBC of a company is not compromised, carriers should be free to incur whatever expenses are necessary to secure new business.
The problem is that RBC is obviously being compromised, judging by the industry’s 2017 results. Action must be taken, though admittedly, it is a complex problem to unravel. For companies that wish to play strictly by the book, the easiest solution is to stay within the prescribed OJK acquisition cost depending on the type of insurance: be it auto, property, etc. Any additional fees should be kept to within a few percent or eliminated altogether.
However, it is asking a lot to play by the rules if no one else does; if a company progressively loses market share by playing by the rules in a market where no one else respects the rules, there is little consolation to being ‘the poster boy’ for fair play.
Insurance brokers have an important role to play and engineering fees are legitimate and add value if handled properly. The problem is not with the concept of an engineering fee but the way it is being misused. We must not unduly blame brokers but continue to encourage and develop their expertise and professionalism.
In the end, we must not lose sight of the basic fact that it is the insurance company that carries the risk. If the premium income is spent on acquisition fees, ultimately it is the carrier that must carry the underwriting risk, not the intermediaries, agents and brokers who do not have to worry about actuarial assumptions, claims and all subsequent consequences. Ultimate responsibility lies with the insurer.
The buck stops with them.
If there are unscrupulous parties who will pay any price for market share in the hope of flipping the portfolio or making short-term profit, the OJK must take action to bring them in line with acceptable practices for the sake of the market as a whole: sanctions are needed; deterrents are a must.