The Risk and Insurance Management Society (RIMS) issued a statement today calling for insurers to pull back their new bonus compensation plans for brokers and asking risk managers to push their brokers for transparency, concerning fees.
While RIMS has issued previous statements concerning broker compensation, “this time we brought the insurers into the mix,” said Terry Fleming, a RIMS director and director of the division of risk management for Montgomery County, Md.
He told National Underwriter RIMS is concerned that the carriers are pushing “a compensation model when it’s fraught with issues.” He mentioned points that were brought out in investigations by the New York Attorney General’s Office and other authorities revealing that insurers paid brokers hidden fees as rewards for steering and bid-rigging.
In March, insurance carriers Travelers and Chubb said they were developing supplemental payments that would replace contingent commissions they no longer pay to producers.
Joseph Plumeri, chairman and chief executive officer of Willis, soon after announced his firm would not accept the new compensation schemes. He told NU at the RIMS conference in New Orleans in April that “Any formula that suggests business be given to Tom, Dick or Harry based upon anything retrospective or prospective is a conflict.” (NU May 7, 2007)
Marsh CEO Brian Storms said at a CEO panel at RIMS that his firm is examining the issue. Aon CEO Greg Case said his brokerage would query clients, but would not do anything to jeopardize its client relationships. J. Patrick Gallagher, chairman, president and CEO of Arthur J. Gallagher & Company, said he also would confer with clients, adding that the broker is “committed to transparency.”
Mr. Fleming, however, said the most recent compensation plans put forth by various carriers is “a model that can be manipulated.” He added that “for that reason, we want to call on the insurers to come up with some other form of compensation, or some other way to work the compensation.”
He said RIMS also has called on risk managers “to step up, be more vocal and hold their vendors accountable.”
“This is something the brokers have been telling us for years, saying risk managers have the power, so they need to use it, to make sure they’re getting what they want in dealing with the brokers and insurers,” Mr Fleming said.
RIMS said in a statement that, “in response to regulatory matters and settlement agreements, many brokers pledged to refuse to accept placement fees from insurers on business where they represent the buyer.”
“RIMS applauded this action and supported the prohibition on the use of placement service agreements or other similar arrangements for the entire broker industry.”
The statement continued that RIMS is “disappointed to learn that some brokers are apparently reconsidering their pledge to refuse to accept these fees.”
RIMS said that contingent commissions are currently paid on agency-generated business, where the agent represents the insurer and not the buyer. “Such practices have always existed in the insurance markets,” RIMS said.
“However, for brokers and independent agents to accept these fees in transactions that are made on behalf of the buyer represents an inherent conflict of interest,” the association said.
“The recent investigations, admissions and fines demonstrate how these practices can be manipulated to the disadvantage of the insurance buyer,” RIMS commented.
RIMS said it recognizes that many smaller, regional or privately held brokerage firms were not part of the various investigations and settlement agreements, “and have continued to utilize placement service agreements and contingent compensation arrangements.”
RIMS said it supports the prohibition of these compensation arrangements “for any broker or agent acting on behalf of a buyer,” and believes that all sources of compensation, “direct and indirect, now or in the future, should be disclosed to clients without their request.”
The statement read that the existence of compensation arrangements and the amount of potential compensation should be disclosed “prior to placement of business and annually by line of coverage. Failure to disclose such arrangements runs counter to the spirit of partnership that risk managers seek to achieve with their brokers, vendors and insurers.”
This disclosure, RIMS said, will ensure that the risk manager understands not only the cost of coverage, “but any arrangements with specific insurance companies or any fees obtained by the broker/agent from markets approached on behalf of the insured.”
RIMS said it advocates for an open dialogue among all parties on all issues of compensation, as well as all other aspects of the insurance transaction.
RIMS said risk managers must evaluate the level of transparency and full disclosure in their broker relationships. “To effect change, risk managers must vocalize their concerns and hold their providers accountable,” RIMS said.
Why haven’t risk managers been more vocal up to now? “I wish I could tell you,” Mr. Fleming responded.
He noted that transparency needs to be “built into the contract,” and brokers need to be aware of it.
“You pay [brokers] a fair fee for their service and you require them to be transparent in all the transactions,” he explained. “So when they’re out placing business for me, they’re required to come with all the proposals they get, all the pricing, and then I make the decision on where the business gets placed.”