By Huw Jones
LONDON (Reuters) - Britain's markets watchdog will review whether the wholesale insurance broker sector is giving value for money following concerns over how large players place business to earn fatter fees.
The Financial Conduct Authority (FCA) said "broker facilities" will be a focus, a reference to how a broker groups together different types of insurance business for different clients and then allocates chunks of this group of business to insurers.
This should make insurance cheaper for clients but can leave insurers with little scope to dictate their own terms.
The London insurance market controlled more than $91 billion (69.25 billion pounds) in gross written premium in 2015. It comprises the Lloyd's of London market and brokers such as Aon (N:AON), Willis Towers Watson (O:WLTW), JLT (N:JLT) and Marsh (N:MMC).
The FCA said larger brokers may be using their market power to oblige insurers to sign up to these facilities or pay for wider services such as data, analysis and product design.
"The London broker's role is to make sure that their clients obtain appropriate coverage for their needs, at a price that represents value for money," the FCA said in its 30-page terms of reference document for the review published on Wednesday.
The review will also look at conflicts of interest in the sector as there may be extra incentives for brokers to place business in facilities even where it may not be the best option for their clients because in many cases they receive larger fatter fees, the FCA said.
The review will also study how brokers influence competition in the underwriting sector, such as by placing business in facilities rather than on the open market.
"The FCA believes that effective competition contributes to ensuring London remains an international centre for insurance."
Britain's government is keen for the City of London to remain the world's largest financial centre after the UK leaves the European Union in 2019, and financial services is also a major tax earner for treasury coffers.
Evan Greenberg, chairman and chief executive of insurer Chubb (N:CB), told shareholders in April that the "soft" insurance market was a sign of "abusive behaviour" by some brokers who "enrich themselves at the expense of both their customers and underwriters".
The FCA has powers to force through changes in the structure of the market if it finds uncompetitive behaviour.
The watchdog will publish interim findings in autumn 2018 with "any potential solutions to address concerns".