Big brokers that continue to accept contingency fees will face a disadvantage against those that have sworn off controversial, volume-based bonus commissions, predicted the chief executive of Marsh & McLennan, Michael G. Cherkasky.

MMC's president and CEO said the fact that its insurance brokerage arm no longer takes contingent commissions means Marsh will be forced to market its services on a value-added basis to grow its business. He predicted that clients will come to view brokers who accept contingents negatively, adding that Marsh will work to take advantage of that perception.

MMC was one of the four major insurance brokers that agreed to abandon contingent commissions after investigators charged they were used by insurers as kickbacks for broker participation in bid-rigging and steering of contracts.

"Contingents are not a best practice" for the major brokers, Mr. Cherkasky said during the recent Merrill Lynch Insurance Investor Conference, broadcast over the Internet, although he conceded that when it comes to smaller insurance agencies, "it's a different value proposition."

While Marsh and big broker contingent agreements were based on the volume of business placed with certain carriers, most independent agency deals are based on the profitability of business, he noted.

Mr. Cherkasky said Marsh is seeing improved signs in its business. Account retentions were up in the fourth quarter, and for the first time since the bid-rigging scandal hit over a year ago, the broker saw net new business in January along with improved retentions, he added.

"Where we are going is fairly predictable," he said, citing the firm's positive financial momentum. "The question is, how fast are we going to get there?"

In an analyst note, David Small, with Bear Stearns, said he was maintaining the investment firm's favorable rating of MMC despite a disappointing earnings report.

For his part, Brian Meredith, an analyst with Bank of America, wrote in his note that MMC should see continued improvements, although he called the company's turnaround slower than expected.

MMC reported fourth-quarter net income of $35 million, compared with a loss of $680 million the year before. Revenues fell 2 percent to $2.83 billion. For the year, net income improved 130 percent, up $228 million to $404 million, despite revenues falling 1 percent to $11.7 billion.

For MMC's insurance services segment--which includes insurance broker Marsh and reinsurance broker Guy Carpenter--revenues dropped almost 10 percent for the year, down $600 million to $5.6 billion. Still, during an analyst's call, Mr. Cherkasky said MMC is "a stronger company than it was, and a better-positioned company than a year ago. We are not where we want to be, but we are heading in that direction."

The loss of contingent commission income meant the brokerage had to reduce head count and abandon unprofitable accounts that were considered too small for Marsh to handle. "We will never be the old Marsh," said Mr. Cherkasky. "We can't afford to be."

Special Reports /

Contingency Fees No Longer A Bonus, Marsh CEO Warns

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