They say that he who pays the piper calls the tune. So why don't more risk managers just pay their brokers a set fee like they do their lawyers, accountants, consultants and other professional advisers, rather than complain about contingent commissions corrupting the insurance placement process?
That was the main question on my mind after all the fuss made about contingent commissions here in Boston at the RIMS conference. Full disclosure of broker compensation should be a given, but why bother trying to figure out whether brokers are steering business to suit their own bottom lines, when such conflicts can be avoided altogether by simply paying directly for brokerage services?
The debate over contingent commissions raged anew during the Risk and Insurance Management Society's annual conference.
Joe Plumeri, CEO of Willis, launched a Web page here this week--www.ClientsBeforeContingents.com--to "educate" risk managers about the evils of such fees, and to urge buyers to vote with their wallets by patronizing brokers (like Willis) that refuse such bonus commissions. (You can read more about the Willis initiative here: http://bit.ly/cRBR8q.)
Other brokers say this is all a bunch of hooey! Dan Glaser, chair and CEO of Marsh, said during a broker CEO panel discussion at the conference that the controversy over contingents is "a bit of a red herring.”
"I don't think taking contingents is a litmus test on whether a broker has a conflict of interest," he said. "Lots of other revenue streams could present a conflict. The solution is full disclosure [of broker compensation.]." (You can read more about reaction from other brokers here: http://bit.ly/bJioPQ.)
The voice of reason here came from Evan Greenberg, chair of ACE Ltd., who said during another RIMS panel discussion that “since brokers, unlike agents, work for the client, in a perfect world the client would pay their broker directly. But that’s not the way the system usually works.”(You can read more about insurer reaction here: http://bit.ly/9O0Eqz.)
Mr. Greenberg pointed out that ultimately, “we have to look to the buyer. Either way, it’s your money paying brokers. What form of broker compensation is your organization comfortable with?”
Exactly! Instead of fretting over whether brokers do or do not take contingents, or whether they fully disclose such compensation, why don't risk managers simply negotiate a service fee with their brokers and be done with it?
I asked that question at the press conference with RIMS leadership.
"Most sophisticated risk managers handle this well," said RIMS President Terry Fleming. "They have service agreements, like the one I have with my broker, who we pay on a fee basis. They are prohibited from accepting commissions from carriers, and if the structure of a placement includes any commission, that must be fully disclosed, and is deducted from the fee we owe, so there is no incentive to serve the carrier rather than the client."
That makes perfect sense, and should be standard operating procedure for risk managers. But Mr. Fleming said that "mid-size or smaller risk management programs only have an insurance buyer on staff or a part-time risk manager who often don't know how to handle such situations. We want to educate them on how to manage broker compensation."
Scott Clark, director of the RIMS External Affairs Committee, added that "the skill set of many risk managers does not normally include the nuances of broker compensation."
Mr. Clark, who is the risk and benefits officer for the Miami-Dade County public school system, said that even if contingent deals are disclosed, many risk managers don't know what to make of them.
Education here is critical. RIMS is taking a stab at it, and it should certainly be part of any risk management designation program.
In the meantime, however, Mr. Fleming--director of the risk management division for Montgomery County, Md.--called on his fellow risk managers to "walk the talk. There are brokers out there who won't take contingents. I go with such a broker." More should follow Terry's lead.
He added that "there has to be another [broker compensation] model out there that doesn't involve back-end payments and the conflicts that could result."
Amen.
I personally think many risk managers are afraid to do business with their insurance broker on a fee basis. It's a lot of extra work, for one thing--why not just let the insurance company take care of that? And who knows how much a broker should be paid? Should the lowest bid prevail?
How much is a broker worth, anyway? That's a question too few risk managers ask themselves, and that's because most haven't a clue what their brokers are actually paid.
If a buyer truly wants to be free of any concerns over potential conflicts of interest, just negotiate a reasonable fee for services rendered, period. That way, risk managers will never have to lose any sleep over whether their broker is serving one too many masters.
What do you folks think?
