Advice To Buyers: Know Thy Underwriter Relationship with carrier can help avoid bid-rigging, risk manager says

Buyers who know their underwriters are less likely to be cheated by their broker, a top company risk manager contends.

“The relationship you develop with your underwriters is as critical as the relationship you develop with your broker,” according to Paul Buckley, vice president of risk management for Tyco International (U.S.) Inc., in Princeton, N.J. “The reason is, the only way that you can be brokered meaning that somebody could bid-rig you is if there is no relationship between you and that underwriter,” he explained.

Mr. Buckley spoke recently before the Association of Professional Insurance Women in New York about the fallout of regulatory probes exposing market manipulation by brokers.

“One of the reasons I've always been comfortable is that I know all my underwriters,” he said in a followup interview, adding that his underwriters are confident they can report any suspicions to him. “If somebody was doing something, I?d hear about it. It has to be a three-legged stool you the risk manager, the broker and the underwriter.”

Through the years, he said, a number of risk managers have relied too much on their brokers. This, according to Mr. Buckley, is an inherent conflict because the broker ends up making risk management decisions.

“The broker is nothing more to me than an extension of my risk management organization, who has access to the marketplace to tell me what's going on,” he said, adding that at the end of the day, “I have to be in a position to make the [buying] decision.”

Can a broker influence a risk manager's decision-making? “Absolutely,” he noted, adding that the risk manager needs to be sure the broker's influence is in the buyer's best interest. “Is what they are presenting to you logical? [If not,] you need to ask why this doesn't make sense.”

Mr. Buckley added that some risk managers are afraid to speak up when they don't understand something.

“When I first became a risk manager, I came from a claim environment,” he said. “I was good at stopping someone and asking them to explain it and make it logical. If he couldn't make it logical to me, it was usually because it was wrong.”

In terms of compensation, he told NU, “I have always been on a fee-based relationship with my brokersI was screaming in ?89 and ?90 about why I felt [placement service contingency agreements] were a conflict, and the New York Insurance Department failed to do anything about it.”

New York Attorney General Eliot Spitzer and other authorities have charged that such incentive fees amounted to hidden kickbacks provided to brokers for steering business to select insurers.

Mr. Buckley said the brokers' position was that the contingency fees they received were compensation for work being done on behalf of the carrier. “Therefore,” he noted, “they have given up the opportunity to collect that, and they should not be trying to recover that from me and the risk management community.”

Mr. Buckley noted that if brokers operate “on the model that says they will walk away from unprofitable business, then it will be a more profitable company and I will get the service I need and pay for.”

He explained that brokerages have said they will “walk away from certain lines of business or certain customers that aren't profitable.” If they don't live up to this standard, he added, “in the end, I'm going to get shortchanged, and I'm not willing to accept that.”

Reproduced from National Underwriter Edition, April 15, 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.

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Advice To Buyers: Know Thy Underwriter

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