Spitzer Probes Will Have Benefits, Say CIAB Chair Brown

Broker execs say compensation disclosure is good for thefuture

By Mark E. Ruquet

White Sulphur Springs, W.Va.

New York Attorney General Eliot Spitzer's charges against theinsurance industry were a shock, but ultimately the results willbenefit the business, the chairman of the Council of InsuranceAgents & Brokers said last week. J. Hyatt Brown said the worstis over, but predicted that the fallout from the Spitzer probes isfar 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 & Brokersannual Leadership Forum here at The Greenbrier in White SulphurSprings, W.Va. by commenting on the impact of Mr. Spitzer'sactions.

The Spitzer investigations into bid-rigging==which wouldeventually see the four largest brokerage firms in the UnitedStates give up contingent commissions--has led to the conviction of17 insurance executives thus far.

The executives, from insurance brokerage firm Marsh==asubsidiary of New York-based Marsh & McLennan Companies--aswell as several carriers, were convicted on charges that the brokerconspired to manipulate the placement of insurance contracts inexchange for kickbacks in the form of lucrative volume-basedcontingent commissions.

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

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

The association went further, explaining to regulators andelected representatives the importance of what brokers do forclients, Mr. Brown said.

In an interview with National Underwriter prior to the meeting,Mr. Brown said regulators are recognizing that there is adifference between the volume-based contingent commissions, whichthe four major brokers gave up, and the profit-based contingentcommissions that other brokers and agencies receive. He said thatsince these commissions are incentives to producers to work atmaking accounts more risk adverse, they are ultimately in the bestinterest of insurers and policyholders.

Although it has been a year since investigations began, theinvestigations, which have grown national in scope, are not over,he warned. "There will be more to come," he said, withoutelaborating further. He added, "After this is complete, we will allbe better for it."

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

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

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

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

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

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

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

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

Mario P. Vitale, chief executive officer for Willis NorthAmerica, agreed there will be a two-tiered system. But echoing aview previously expressed elsewhere by Willis' CEO and chairman,Joseph Plumeri, Mr. Vitale said the two-tier system "cannotcontinue in the long run," declaring that all contingents thatbrokers receive should be abandoned.

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

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

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

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

Beyond talk of the Spitzer probe fallout, there was muchdiscussion at the CIAB meeting about the possibility of a hardeningmarket, thanks to recent catastrophes. This was in marked contrastto last year's gathering, when talk centered on a deepening softmarket.

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

Katrina "is a vertical event, affecting reinsurance" that willaffect 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 inthe future, which, in turn, could affect capacity, he said. Furtherclouding predictions, he said, is uncertainty surrounding themagnitude of business interruption losses and questions aboutmodeling for catastrophes.

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

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

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

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

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

Gallagher's Mr. Gault said Katrina is expected to affect themarkets to different degrees, but to what extent will not be seenfor months. One outgrowth would be more focus on catastropheprograms 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 greaterquestions about the models if these patterns of catastrophescontinue."

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

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

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

Pullquotes for page 6:

"Even though there is pain and anguish, even though there ischange, even though there is dislocation, even though there isheartache, ultimately, good will come" of investigations of brokercompensation practices.

J. Hyatt Brown, CIAB Chair

"Contingency settlements have created two different brokeragemarkets--those who are required to be transparent and those whoaren't."

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

Pullquotes for page 25:

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

Mario P. Vitale, CEO, Willis North America

"Market change will be driven by reinsurance."

Robert F. Howe, Director, Marsh