Risk managers from both the private and public sectors issued renewed calls for complete transparency and full disclosure of all broker revenue from insurance placements and services to make sure every transaction is in the buyer's interest.

The latest push for broker compensation disclosure came in separate statements and independent initiatives from the Risk and Insurance Management Society and the Public Risk Management Association.

The RIMS report–”A Practical Guide to Insurance Broker Compensation and Potential Conflicts of Interest for the Risk Manager”–was released to assist corporate insurance buyers in understanding broker compensation and potential conflicts of interest, the New York-based group said.

The ultimate goal of the report, according to RIMS, is to “heighten members' awareness of the potential pitfalls surrounding the insurance purchase transaction, so buyers are empowered to press for greater transparency in their negotiations with brokers as well as for regulatory reform in their own states.”

“In ideal settings, insurance brokers and risk managers are working very closely toward a common goal–marketing the insured's coverage to achieve optimal results within the commercial insurance market,” said Deborah Luthi, director of the RIMS External Affairs Committee, as well as director of enterprise risk management at Matheson Inc.

Broker compensation has been a controversial issue since 2005, when an investigation by the New York State Attorney General's Office revealed that commercial insurance brokers had accepted undisclosed contingency payments from insurers for steering customers their way, with bid-rigging exposed as well.

As a result of that probe, some major brokerages agreed to cease accepting contingent commissions–bonus fees based either on the volume of business a producer places with a carrier, or on the quality of that business in terms of loss experience.

Ms. Luthi said that because regulators have “yet to mandate full disclosure, risk managers must be diligent in their broker selection process. This report gives them the tools they need, not only to successfully make that selection but to drive a higher standard of conduct industrywide.”

In tandem with the executive report, RIMS also released a revised position statement on broker compensation. It reiterates the call for risk managers to demand full transparency of all revenue streams by the broker in advance of any submission to market, purchase or placement of coverage.

The statement also addresses broker-marketed new products and services to carriers. “While RIMS takes no issue with new products, there must be a separate agreement between the two parties which does not link these services to specific clients,” Ms. Luthi said.

“However, if a broker receives payment from both the carrier and the buyer for placement of insurance products, all transparency requirements should adhere to that transaction,” she added.

The report stresses that any compensation to the broker from insurers with whom the broker places client business must be transparent or eliminated altogether to ensure that the brokers are acting solely in the interest of their client.

The report also includes:

o An extensive outline of insurance broker compensation arrangements.

o Tips for crafting an effective request for proposal.

o Recommendations for delineating services to be provided and associated charges within a service level agreement.

Meanwhile, PRIMA released a statement calling on insurance brokers to disclose all compensation arrangements with insurers to the public jurisdictions they deal with.

“Transparency in government is a prerequisite to financial oversight and budgetary control regardless of the size and make-up of the public entity, said the Alexandria, Va.-based PRIMA.

“Public-sector employees are held to high standards of transparency whenever they provide programming and services to their communities,” PRIMA added. “These high standards are especially pertinent when it comes to the management of public funds.”

PRIMA said it would like to “reiterate that full and mandatory disclosure of ALL forms and sources of broker compensation should be provided to purchasers of insurance.” PRIMA said transparency in broker compensation is important for the following reasons:

o The disclosure of broker compensation that is concurrent with the release of insurance program information is fiscally responsible. Therefore, all costs associated with an insurance purchase are captured as a cost to the program whenever the policy is bound.

o Complete transparency is the only way to maintain trust in the purchasing process, particularly when it involves public-sector employees, who are subject to intense public scrutiny and are charged with the public trust.

PRIMA added that the conduct of risk managers and other public employees and officials “must always be professional and above-board. This means that the transactions they are involved with must be done in good faith and with complete integrity. The divulging of potential conflicts of interest gives support to transparency and promotes open communications between the engaged parties.”

PRIMA said it supports efforts that encourage and enforce full disclosure of insurance commissions or “other payment relationships that could either affect the placement of insurance coverage or have the appearance of such an impact.”

PRIMA said it will “continue to advocate for open dialogue on this matter.”

Special Reports /

Private, Public Buyers Push Brokers For Full Transparency On Compensation

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