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HMRC internal manual

Insurance Premium Tax

Calculating the value of the premium: intermediaries: the effect of intermediaries on the value of the premium

‘Intermediary’ is a term covering both brokers and agents. Although there is no definition of brokers or agents in UK law, a broker usually acts for the insured while an agent acts for the insurer.

The Financial Services and Markets Act (FSMA) gave additional regulatory powers to the FSA to regulate the activities of insurance intermediaries. This was to meet the requirements of the EU Insurance Mediation Directive. There is more information on the regulation of brokers and agents in VATINS5000.

As the number of insurers and the range of insurance they offered increased the need for intermediaries developed. Businesses that would not normally consider themselves to be brokers or agents, in the traditional sense, nevertheless fall within the definition of intermediary. The role of intermediaries also changed. Originally their primary role was to introduce customers to insurers either for the benefit of the customer (a broker) or for the benefit of the insurer (an agent). Brokers and agents commonly receive a commission from the insurer (i.e. a share of the premium). However, as noted in IPT02500, some brokers may charge the insured a separate fee as an alternative to taking a commission.

Some intermediaries have a greater role. They are allowed to bind customers and insurers to a contract and/or handle claims etc. Insurers have come to rely on intermediaries to find and deal with customers, negotiate the contract and the premium, collect the premiums and handle any claims resulting from those contracts. As a result the insurers confine their activity to underwriting the contract. In practice many intermediaries only pay to an insurer the net premium remaining after the deductions of commissions, and the settlement of claims etc.

In ‘direct’ insurance, personal lines insurance (for example, motor or household contents insurance) is marketed by the insurer through television and/or newspaper advertising. The direct insurers have specialist centres which deal with clients, usually by telephone. This type of business has reduced the involvement of high street brokers in selling personal lines cover.

Some examples of the effect intermediaries have on the value of premiums can be found in IPT05570 and IPT05580.