Probes Alter Broker-Buyer Relationship

Spitzer's bid-rigging, fee abuse revelations prompt more vigilance from buyers

As brokers contend with an altered operational landscape in the wake of investigations into conflicts of interest, bid-rigging and contingency fee abuse, buyers also are dealing with a new reality–that they can no longer take their broker relationship for granted.

There are lessons to be learned from the scandal, industry observers contend. One consultant suggests corporations should invest more in the insurance buying process, while another suggests risk managers need to devote more time and attention to the decision-making process in purchasing coverage and services, as well as in monitoring the work of their vendors–brokers foremost among them.

“The first thing to remember is that the controversy involved a small number of executives involved in bid-rigging,” noted Nanci Evarts, president of Marketing Strategies Group in Westlake Village, Calif.

However, the probes by New York Attorney General Eliot Spitzer prompted the world's three biggest brokers–Marsh, Aon and Willis–to give up volume-based contingency fees and become more transparent in how they are paid, as well as how they shop accounts.

With transparency comes responsibility for the buyer in keeping their brokers honest, Ms. Evarts noted.

“In the post-Spitzer era, a vast number of brokers will take their fiduciary responsibilities more seriously, but it also raises a risk manager's need to do their due diligence,” she added.

Andrew J. Barile, president of Andrew Barile Consulting Corp. in Rancho Santa Fe, Calif., noted that the scandal has “raised the bar for risk managers.” He said a buyer's first concern now should be to get the budget needed to choose the right broker for the job and properly supervise their work.

“No one learned what this was really costing them until this scandal showed that the agenda of the broker was not necessarily the agenda of the risk manager,” according to Mr. Barile.

Since not all risk managers are as informed as they would like to be, he noted that one of the first investments he sees them making is hiring impartial third parties to help with buying decisions. “I feel more consulting is in the picture,” he said.

This is especially true at midsize and smaller firms, he added, because while large corporations may have the luxury of hiring a risk manager to devote full-time attention to insurance, smaller firms cannot afford to do so. Such firms by necessity must rely more on brokers to serve as their risk managers, which is where consultants can be valuable in providing an objective second opinion, he added.

Mr. Barile said that as well as finding the best broker for a program, there is also pressure to market the company's different programs to a number of brokers, and in turn, different insurers.

Since a consultant's fee is not “predicated on the cost of the insurance,” he observed, organizations need to invest in the process by increasing their risk management budget to allow more objective oversight of the insurance negotiation process.

“If you raise the bar for risk managers to be more involved in the process, then you have to increase the budget for them,” said Mr. Barile. “But too many corporations are not increasing these budgets. Right now, the only story the risk manager is getting back from the broker is what the broker wants them to know. The paradigm needs to change in the future.”

The reality is that while large corporate risk managers can devote all their time to assessing, mitigating and insuring their exposures, Ms. Evarts pointed out that small and midsize buyers remain very dependent on their broker.

While companies without full-time risk managers might be well-schooled in their own exposures, knowing where to go for coverage and what alternative markets might be out there still remains the purview of the broker.

“The relationship is more complex than just to be allowed to be commodity-driven,” according to Ms. Evarts. “The price comes from the carriers. What the risk manager needs from the broker are insights and the ability to forecast what risks need to be addressed and how to budget for that expense.”

When it comes to examining the risk manager-broker relationship, Ms. Evarts said, a discussion of exposures as well as loss control and coverage options should take place more than once a year. It should be a continuing dialogue examining where risk trends are going, while setting up plans for the next series of placements in risk management initiatives.

Although risk managers might be leery of being cheated by their brokers after all the negative publicity generated by the Spitzer probes, Ms. Evarts cautioned buyers against replacing their broker arbitrarily. While discussing expectations, concerns and compensation for services each year is a good idea, “unless the broker makes a horrendous mistake” there is more to be gained through a long-term relationship with a broker familiar with the account's history, she added.

“The implications of the Spitzer probe may be that risk managers alter their relationships and act more aggressively, but unless there is a problem, it is better to meet and discuss the relationship,” observed Ms. Evarts. “It is very time-consuming to switch brokers each year.”

Infographic Sidebar, with broker on the hot seat art?

Flag: Let The Buyer Beware

Head: Brokers On The Hot Seat

Charges of bid-rigging and other conflicts of interest on the part of brokers have put pressure on corporate buyers to be more diligent in managing their intermediaries. Among their options:

o Buyers need to invest more time and attention to the decision-making process in buying coverage and services.

o Risk managers must carefully monitor the work of their vendors–brokers foremost among them.

o Consultants could be hired to serve as objective third parties to help assess the buying process, particularly at companies without full-time risk managers.

o A continuing dialogue should be held about exposures, loss control and coverage options, not just once a year at renewal.

o Multiple brokers can be hired to market different exposures, although that could dilute the company's buying power.

o Brokers should not be replaced arbitrarily, as there is an advantage to long-term relationships with a broker who is knowledgeable about your account.

Quoteboxes: Barile mug is pickup, hoping to get Evarts mug

“In the post-Spitzer era, a vast number of brokers will take their fiduciary responsibilities more seriously, but it also raises a risk manager's need to do their due diligence.”

Nanci Evarts, President

Marketing Strategies Group

“[Buyers didn't learn] what this was really costing them until this scandal showed that the agenda of the broker was not necessarily the agenda of the risk manager.”

Andrew J. Barile, President

Andrew Barile Consulting Corp.

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Probes Alter Broker-Buyer Relationship

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