Spitzer Probes Will Have Benefits, Say CIAB Chair Brown

Broker execs say compensation disclosure is good for the future

By Mark E. Ruquet

White Sulphur Springs, W.Va.

New York Attorney General Eliot Spitzer's charges against the insurance industry were a shock, but ultimately the results will benefit the business, the chairman of the Council of Insurance Agents & Brokers said last week. J. Hyatt Brown said the worst is over, but predicted that the fallout from the Spitzer probes is far from finished.

"For many, [the actions are] viewed as negative," said Mr. Brown, who is also chairman and chief executive officer of Brown & Brown Inc., based in Daytona Beach, Fla. "But, quite frankly, even though there is pain and anguish, even though there is change, even though there is dislocation, even though there is heartache, ultimately, good will come."

Mr. Brown opened the Council of Insurance Agents & Brokers annual Leadership Forum here at The Greenbrier in White Sulphur Springs, W.Va. by commenting on the impact of Mr. Spitzer's actions.

The Spitzer investigations into bid-rigging==which would eventually see the four largest brokerage firms in the United States give up contingent commissions--has led to the conviction of 17 insurance executives thus far.

The executives, from insurance brokerage firm Marsh==a subsidiary of New York-based Marsh & McLennan Companies--as well as several carriers, were convicted on charges that the broker conspired to manipulate the placement of insurance contracts in exchange for kickbacks in the form of lucrative volume-based contingent commissions.

Mr. Brown praised the CIAB for getting out in front of the issue and declaring that disclosure would be best for the industry.

The CIAB also issued notes to brokers concerning what should be available to clients in the way of disclosure, and how brokers should answer questions about the issue.

The association went further, explaining to regulators and elected representatives the importance of what brokers do for clients, Mr. Brown said.

In an interview with National Underwriter prior to the meeting, Mr. Brown said regulators are recognizing that there is a difference between the volume-based contingent commissions, which the four major brokers gave up, and the profit-based contingent commissions that other brokers and agencies receive. He said that since these commissions are incentives to producers to work at making accounts more risk adverse, they are ultimately in the best interest of insurers and policyholders.

Although it has been a year since investigations began, the investigations, which have grown national in scope, are not over, he warned. "There will be more to come," he said, without elaborating further. He added, "After this is complete, we will all be better for it."

"It may be one, two or three years down the road, but it will all work out," he said.

Robert F. Howe, director of North American Property Operations for Marsh, spoke to NU about questions that carriers have had about brokers' new business model. The carriers were misinformed about some aspects of the settlement agreements, which brokers clarified, he said. There were also questions about the organizational changes within Marsh that concerned carriers.

"They wanted to be sure we are connected right," he noted, referring to the way in which organizational changes impacted interactions between different units within Marsh. "They want to understand how we are doing and what our retention rates are."

He said while there have been internal changes, they "have been good changes and our people are working it out."

Overall, he said he believed that talks between the carriers and Marsh were positive.

James S. Gault, president and chief operating officer of the brokerage services of Itasca, Ill.-based Arthur J. Gallagher & Co., which announced a settlement with the Illinois attorney general's office to end its investigation, said giving up contingency fees would be a challenge.

"Contingency settlements have created two different brokerage markets--those who are required to be transparent and those who aren't," he said.

"We believe the early stages of transparency and disclosure will be a bit confusing for buyers, but in a very short period of time [will] become something buyers will want," he said. "In the long term, it's good for clients and it will be good for the brokerage industry."

Mario P. Vitale, chief executive officer for Willis North America, agreed there will be a two-tiered system. But echoing a view previously expressed elsewhere by Willis' CEO and chairman, Joseph Plumeri, Mr. Vitale said the two-tier system "cannot continue in the long run," declaring that all contingents that brokers receive should be abandoned.

On a separate matter, Mr. Vitale said Willis was also advocating to carriers that the carriers need to improve their practices, especially in the area of contract certainty. Mr. Vitale said it should not take anywhere from 60 days to six months for an insurance policy to be issued, adding that 30-to-60 days was a reasonable amount of time.

"There is no good reason why it takes as long as it does," he said.

He noted, however, that changes would not come until there "is a client ground swell" demanding the change.

"We are [the clients'] voice, but we need their voices too," he remarked.

Beyond talk of the Spitzer probe fallout, there was much discussion at the CIAB meeting about the possibility of a hardening market, thanks to recent catastrophes. This was in marked contrast to last year's gathering, when talk centered on a deepening soft market.

The consensus opinion appeared to be that any upward turn would be fueled by reinsurance price changes. But the extent to which the primary market would harden remained a central question.

Katrina "is a vertical event, affecting reinsurance" that will affect property and marine lines the most, said Mr. Howe of Marsh. Unlike the aftermath of 9/11, when prices escalated dramatically, however, he did not foresee the same sharp increases.

Still, there could be some conservative placement of capital in the future, which, in turn, could affect capacity, he said. Further clouding predictions, he said, is uncertainty surrounding the magnitude of business interruption losses and questions about modeling for catastrophes.

"All of that makes it a bit complex to forecast for the future, but market change will be driven by reinsurance," Mr. Howe said.

F. Michael Crowley, president of Glen Allen, Va.-based Hilb, Rogal & Hobbs, said prices of "any catastrophe risks will go up significantly," adding that large property risks will see the most immediate increases.

Martin L. "Mell" Vaughan III, HRH's chairman and chief executive officer, added, "No one is saying the increases will be limited to property." He also said insurers would more closely scrutinize coastal exposures as a result of recent storms.

Some risks, in the personal lines area, for example, could see increases based on geography, without a general increase across the board in these lines, Mr. Crowley noted.

But the questions about increases, Mr. Vaughan said, will not be fully answered until after the Jan. 1 reinsurance renewals.

Gallagher's Mr. Gault said Katrina is expected to affect the markets to different degrees, but to what extent will not be seen for months. One outgrowth would be more focus on catastrophe programs and a re-thinking of catastrophe models.

"There are so many on the street questioning catastrophe models, asking if the models are good," he said. "There will be greater questions about the models if these patterns of catastrophes continue."

"Traditionally, it takes 90 days to know what happens in the market," said Mr. Vitale. "But there is no question this will have a huge effect on property and energy" lines.

He said capacity could be affected as reinsurers seek to plug holes in their finances as a result of the losses, and this could affect other lines of business. "At the minimum, the downward pressure is gone on casualty and long-tail lines," he noted.

He added, "We are warning clients this is going to be a tight market."

Pullquotes for page 6:

"Even though there is pain and anguish, even though there is change, even though there is dislocation, even though there is heartache, ultimately, good will come" of investigations of broker compensation practices.

J. Hyatt Brown, CIAB Chair

"Contingency settlements have created two different brokerage markets--those who are required to be transparent and those who aren't."

James S. Gault, President, COO, Arthur J. Gallagher

Pullquotes for page 25:

"We are warning clients, this is going to be a tight market."

Mario P. Vitale, CEO, Willis North America

"Market change will be driven by reinsurance."

Robert F. Howe, Director, Marsh

Special Reports /

Spitzer Probes Will Have Long-Term Benefits, CIAB Chairman Contends

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