Broker, Insurer Roles Redefined

A redefinition of the roles of broker, agent and insurer may be underway, according to a new study by Conning Research and Consulting Inc.

In addition, insurers may view the market following probes into broker and carrier misconduct as an opportunity to get closer to their clients, according to Stephen Christiansen, Connings director of research and author of the study. He was referring to investigations by New York Attorney General Eliot Spitzer and others into alleged bid-rigging and contingency fee abuse by certain brokers and carriers.

“The clients, on the other hand, will be looking to ensure that the bidding process is more favorable to them,” he added.

Mr. Christiansen said that in light of questions about the ethics of receiving compensation from both the insured and the carrier, brokers will have to redefine their role through service enhancement and greater transparency. “If the broker cannot make the business case to the client that they add value to the transaction, they will not be able to make up for loss of contingent commissions,” he warned.

However, it is too soon to predict the end of the incentive arrangements, known as contingency fees and market placement agreements, which compensate brokers for either placing a certain volume or quality of business with a particular carrier. “These structures may make more sense than the current conventional thinking suggests,” he said.

For example, a risk manager might face the choice of paying a 10 percent fee to a broker, who then collects a 2 percent contingency commission from the carrier, or simply pay the full 12 percent themselves to the broker, who agrees to collect no fee from the insurer. “And the risk manager may say, I will take the first one,” he said, as long as the relationship with the carrier is disclosed.

In addition, relationships between brokers and carriers can sometimes extend for years and involve various infrastructure investments for which risk managers may realize that certain contingency commissions are appropriate, he noted.

Reproduced from National Underwriter Edition, February 25, 2005. Copyright 2005 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.