Reinsurance brokers can no longer rely on the traditional meansof commission compensation for placing risks, and must begincharging fees similar to other professionals billing for services,says a business professor studying the industry.

In an interview with PC360, Paula Jarzabkowski, professor ofAston Business School and Marie Curie Fellow, says the currentcompensation structure for reinsurance brokers is becoming obsoleteas large insurers seek to place business directly with anincreasingly smaller group of reinsurers.

“Brokers are not getting their cut,” says Jarzabkowski, who leda three-year study of the reinsurance industry that was released ina report late last month titled, “Beyond Borders: Charting theChanging Global Reinsurance Landscape.”

That report, sponsored by the Insurance Intellectual Capital Initiative (aconsortium of organizations associated with the Lloyd's insurancemarket), says the industry is seeking to bundle more and more risks, especiallycatastrophic risks, into single complex programs that could openthe industry to financial meltdown.

Discussing the role of brokers in the reinsurance placementtransaction, Jarzabkowski does not fault brokers for theseplacements, noting that they are following the desires of theirclients.

And her thoughts on broker compensation do not reflect a beliefthat the role of brokers is any less valuable. In fact, she argues,broker services are just as necessary as they have been, and maybemore so.

In the past, brokers did the work of designing, structuring anddeveloping a program, then placing it. Brokers were then paid a feefor the placement.

What is happening more often today is that brokers work on aprogram, and then are not adequately compensated because they donot place the coverage.

“Increasingly, those services have to be valued just like anyother consultant,” says Jarzabkowski. “If you got KPMG, or someonelike that, to do consulting services, you would pay KPMG for theirservices. You wouldn't say, 'Thanks KPMG for doing all that workfor free, but now you get to take it out to the industry and get apercentage for what you are selling it for.'”

She continues, “In the past, the broker was the sales machine.Now, they are not the sales machine; they are more of aninformation and knowledge broker. And in some cases, I think,[brokers are] a very important aspect of the transparency of majorfinancial deals that are global.”

One of the impediments to changing the compensation model istradition, she notes. Some brokers are attached to their clientsand find it difficult to change a longstanding relationship fromits commission compensation model to fee basis.

“It can be a hard cultural change to make,” she says.