Listening To Your Customer

A recent survey asked risk managers what they thought of contingency fees, also known as placement service agreements. The survey revealed that among those risk managers willing to anonymously speak their mind, a majority are not comfortable with the arrangements. Buyers, it appears, have a hard time believing that an insurer willing to pay more in commission for a book of business than another would have no influence over a broker's decision-making.

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

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

Is it Eliot Spitzer? The thinking among New York politicos is that when he gets tired of riding herd over the questionable exploits of New York business executives as the states attorney general, 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 contingency fees. California's Department of Insurance said it is looking into the fees, and Connecticut Attorney General Richard Blumenthal recently jumped in with his own investigation.

But does Mr. Spitzer need another cause for political gain, if that's his motive? Let's face it this is not an issue that is going to catch the attention of the rank-and-file voter. Personal auto or homeowners insurance, yes, but commissions on multimillion-dollar commercial insurance?

It is doubtful that this investigation is taking place to improve a political resume. It is worth noting that in a speech he gave at an association conference in New York City last year, where he was discussing his prosecutions in the securities industry, he did appear to make a veiled threat that the insurance industry could come under a similar investigation someday (although my personal feeling is it was an attempt at humor).

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

One would think that attorneys general throughout the country get a lot of letters complaining about the legality of some issue or another from many people. They don't act on all of them. So what would make this issue stand out now to warrant an investigation?

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

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

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

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

But this brings up a question that brokers should ask themselves. If an anonymous survey can reveal the true feeling among risk managers about such a volatile subject, have brokers listened to what their customers were saying to them privately? Or even 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 serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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