Broker Defends Fees, But Not Rigging

By Mark E. Ruquet

NU Online News Service, Oct. 19, 3:57 p.m. EDT?The chief executive of Brown & Brown brokerage today defended the payment of the controversial broker contingency fees that have been labeled payoffs in a state action against Marsh McLennan's brokerage subsidiary.[@@]

J. Hyatt Brown, speaking to industry analysts, said the problem with Marsh's brokerage practice is not the fees but manipulation of the contracting process.

New York Attorney General Eliot Spitzer in his lawsuit has accused Marsh of taking the fees as payoffs in a price fixing and bid rigging scheme that saw its unwitting clients channeled to insurers who cooperated.

"The issue is not contingent commissions; the issue is bid rigging," said Mr. Brown in response to a question on the subject. "Bid rigging is absolutely, categorically, unequivocally forbidden in our culture."

In defense of contingent commissions, the Daytona Beach, Fla.-based insurance broker said the system has been around for 75 years and is vital to the survival of the insurance brokerage system.

"Contingent commissions have been around and known for probably about 75 years, and contingent commissions in the middle market, where we are, unlike the national brokers, are in the best long-term pricing interest of the client because they force the agent to be as loss sensitive as they can."

Unlike the PSA (placement service agreements) and MSA (market service agreements) that are at the heart of this controversy, that rely upon volume placements for fees, Brown & Brown's contingency fees are tied to loss ratios and the profitability of a carrier's book of business with the broker, explained Mr. Brown, turning the fees into a profit sharing arrangement.

He also noted that unlike Marsh, where agreements are filtered to the head office, each individual office determines the underwriting and contractual agreements at Brown & Brown.

Mr. Hyatt said that there is intense competition within the middle market insurance business from other agents and brokers, and this is another factor that mandates that the broker gets the best terms and conditions for its client.

He said carriers will try to increase their business by increasing straight commissions on occasion, which the broker discloses. He said Brown & Brown has always, and continues to, disclose its compensation arrangements with clients.

Because of the hurricanes that hit Florida, Mr. Brown said the contingent fee commissions from its Florida business may be down by the end of the year because the book was not profitable because of claims.

B&B reported third-quarter net income rose 15 percent, or a little more than $4 million, from $26 million, or 38 cents a share, to $30.1 million, or 43 cents a share.

He called less than two percent third-quarter growth in the firm's Florida business "anemic." He said the firm was unable to secure insurance for clients for a total of 22 days during the period that carriers suspended underwriting during the storm activity. However, he did expect a business pick-up during the fourth quarter.

Overall, for the third quarter, which the company announced Sunday, Brown & Brown reported a 20 percent increase in revenue, or $26.8 million, going from $133.5 million for the three months ending Sept. 30, 2003, to $160.4 million this quarter.

For the nine months, revenues rose 16 percent, or $67.75 million, from $416 million to $484 million. Net income increased 17 percent, or $14 million, from $84.5 million, or $1.23 a share, to $95.6 million or $1.42 a share.

Overall, he called insurance pricing a "mixed-bag," with different lines showing flattening or softening of the market.

He said Florida personal lines has the potential to be a crisis depending upon what the three major underwriters in the state?State Farm, Allstate and Nationwide?do, and if the state's residual market pool holds-up. He added, however, there is also "an enormous opportunity" to write new business, so long as the capacity is available.

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Broker Defends Fees, But Not Rigging

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