Listening To Your Customer

A recent survey asked risk managers what they thought ofcontingency fees, also known as placement service agreements. Thesurvey revealed that among those risk managers willing toanonymously speak their mind, a majority are not comfortable withthe arrangements. Buyers, it appears, have a hard time believingthat an insurer willing to pay more in commission for a book ofbusiness than another would have no influence over a broker'sdecision-making.

Marsh is the culprit for starting this, according to Advisen,the New York City consulting firm that performed the survey andpublished a report about contingency fees (which, for theuninitiated, are extra commissions insurers pay to brokers forgiving them a profitable book of business, or, in some cases, acertain premium volume). Marsh felt it was doing a lot of work forcarriers and should be compensated for it, Advisen noted. After thecarriers saw the wisdom of Marsh's argument, other brokers feltthey deserved the same treatment.

Five years after the initial debate over this controversy seemedto fade away with promises by brokers to disclose the fees, it hascome back to haunt the brokerage community. The question is: Whyhas this issue come back to life?

Is it Eliot Spitzer? The thinking among New York politicos isthat when he gets tired of riding herd over the questionableexploits of New York business executives as the states attorneygeneral, he will train his eyes on the governorship.

His office sent subpoenas to Marsh, Aon, Willis and Kaye Group,as well as some insurers, asking for information about contingencyfees. California's Department of Insurance said it is looking intothe fees, and Connecticut Attorney General Richard Blumenthalrecently jumped in with his own investigation.

But does Mr. Spitzer need another cause for political gain, ifthat's his motive? Let's face it this is not an issue that is goingto catch the attention of the rank-and-file voter. Personal auto orhomeowners insurance, yes, but commissions on multimillion-dollarcommercial insurance?

It is doubtful that this investigation is taking place toimprove a political resume. It is worth noting that in a speech hegave at an association conference in New York City last year, wherehe was discussing his prosecutions in the securities industry, hedid appear to make a veiled threat that the insurance industrycould come under a similar investigation someday (although mypersonal feeling is it was an attempt at humor).

So if Mr. Spitzer's political ego is not responsible, was it aletter from the Washington Legal Foundation a Washington think tankdedicated to free enterprise? While the foundation has raised apoint about the influence the fees can have on insurancetransactions, they don't appear, from their Web site, to have muchof an interest in insurance outside of their letter. One wondershow much influence they have.

One would think that attorneys general throughout the countryget a lot of letters complaining about the legality of some issueor another from many people. They don't act on all of them. So whatwould make this issue stand out now to warrant aninvestigation?

No one in the New York AG's office is talking. Everything isconjecture at this point. When responding to the question about whythese investigations are taking place, brokers have the sameresponse: “We don't know.”

The people who would be most likely to complain, and who wouldhave a dog in this hunt, would be risk managers. It appeared thatthe issue was resolved after the Council of Insurance Agents &Brokers issued guidelines for disclosure of the fees, which brokerssay they follow, and the New York Department of Insurance issuedits own ruling on disclosure. But maybe that wasn't good enough forsome buyers.

In any case, assuming Advisen's survey is an accurate reflectionof the profession at large, a lot of risk managers today don'ttrust their brokers to look out for their best interests at somelevel. This brings up a big question: If you don't trust yourbrokers, why are you doing business with them? Can't you take yourbusiness somewhere else, or do risk managers feel all insurancebrokers are the same with this fee system in place?

When we in the press hear enough noise, we like to report on whois making it, but in this case, the source is hard to pin down. Onefact that Advisen pointed out is this outpouring of honest opinioncame about because of anonymity. Risk managers fear they might facerepercussions for expressing their opinions publicly.

But this brings up a question that brokers should askthemselves. If an anonymous survey can reveal the true feelingamong risk managers about such a volatile subject, have brokerslistened to what their customers were saying to them privately? Oreven bothered to ask?

Mr. Spitzer is obviously listening to someone.

Reproduced from National Underwriter Edition, June 18, 2004.Copyright 2004 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.