Can Producers Also Be Risk Managers?

One producer, Jack Hungelmann, the author of "Insurance for Dummies," was not opposed to the idea, noting that producers should be risk managers for clients if the client is a small business.

"Risk management activities are part of the value-added by producers for small businesses," said Mr. Hungelmann. "Producers can identify, evaluate, and suggest insurance and a few non-insurance treatments for exposures of the small-business client. They also may survey the market for the client, implement coverages to match exposures, and be an advocate or impartial force in a claim."

Mr. Hungelmann, with the Corporate 4 Insurance Agency in Edina, Minn., also noted the conflict if the producer is paid twice–once by commission for the sale of insurance to the client, and again by a fee or salary for the risk management services. He suggested the conflict might be resolved by disclosing all forms of compensation, or by placing insurance outside the agency of the producer with no brokerage commissions.

"With the proper disclosure, and just for small businesses, having the producer as the risk manager for a client is a good idea," said Mr. Hungelmann.

Another respondent, a former producer who is currently in the business of providing risk management training to agents and brokers, concurred. He noted that the absence of any particular designation was not critical to any ethical issues. After all, he wrote, many excellent risk managers have no designations.

One critical factor, discussed later, is the experience the producer will bring to the risk management activities. He also offered solutions for the compensation issue:

First, the producer should only consider being risk manager for a client if he or she is self-employed and not an employee of someone elses agency or brokerage.

Second, the producer/risk manager should not be the agent or broker of record for any of the insurance placed on behalf of the client if a fee is charged in addition to commission. He noted that as a producer, he provided risk management services free. He was willing to do the extra work without compensation as part of his value-added services.

Third, being paid is not an ethical consideration "as long as you do a good job honestly, and earn it."

A third respondent was most concerned with the legality of compensation, or what he called "double dipping," and "mixed allegiances." He considers both potential ethical issues.

As to double dipping, it may ethically be handled by full and complete disclosure of compensation and proper licensing–that is, obtaining a consultants license, if required, and meeting all other state laws concerning the use of a consultants license.

Mixed allegiances are more commonly known as "dual agency." Under "black letter law"–which does not vary from jurisdiction to jurisdiction and has been stable over time–an agent, someone representing a principal, owes his or her loyalty and allegiance to that principal. In the case of a producer/risk manager, the producer may be more than a dual agent as he or she may be simultaneously the agent of an insurance company, the agency or brokerage firm as an employee, and the client for the transaction.

Each of these principals has different and sometime conflicting interests. Dual agency is legal and ethical with full disclosure, but the potential ethical pressures on the producer may be great for some aspects of the relationships.

Ethical issues that can be resolved aside, this respondent was more critical of the business decision of the producer. "This sounds like both an ethical question and a poor business decision. Double dipping is an ethical question and, in some states, is a violation of law. A mixed allegiance is an ethics issue. I do not believe the producer is ethical or successful." He noted that most producers make more money selling insurance. But if the producer is not selling insurance, he can understand the urge to "play" at being a risk manager.

Another producer, and former adjuster in the risk management department of a public utility, was concerned about the producer sharing trade secrets of the client with competitors of the client. He believes the arrangement is not in the best interests of the client, unless the business was so small it could not afford a risk manager.

For clients with risk management departments, he identified a large broker that attempted to have its clients outsource their risk management to the broker. Many clients were offended by this idea and they abandoned the broker, vowing never to use it again.

The only other time this producer believed there would not be an ethical problem is when the client is in a monopolistic position, like a public utility, where there is no threat of sharing trade secrets. In fact, his former utility-employer did outsource its risk management to its broker, and the risk manager of the utility became not only a paid employee of the broker, but also remained as risk manager of the utility.

The owner of the organization that offers risk management training raised the most serious ethical issue. "Is it ethical to promote oneself as a risk managerwithout practical experience?" That question also leads to another: "What does the producer mean by the phrase risk management?"

It is widely held that the risk management process includes the steps of:

Exposure identification and analysis.

Examination of loss control and loss-financing alternatives.

Selection of the best combination of loss control and loss-financing alternatives.

Implementation of the selected alternatives.

Monitoring the results.

A true risk manager would be familiar with each step, and would have access to resources for the activities associated with each step.

In the case of the small business, the most likely alternatives are in loss financing with use of retentions (deductibles) in combination with insurance. Even then, a producer/risk manager should take the time to examine various loss prevention and reduction techniques so as to reduce losses payable. For example, the producer/risk manager:

Needs the experience and ability to interpret leases and other contracts that may be transferring risk to or away from his or her client.

Must be able to identify and treat both the common and unique exposures for the type of business run by the client.

Must be willing and able to engage in the activities associated with each step of the risk management process.

For larger clients, more risk management skills are needed. A risk management headhunter related a story of a "regular" producer in a risk manager capacity for a client with a large liability self-insured retention. The producer/risk manager had no skills in setting reserves. Over a couple of years he so significantly under-reserved claims that the client almost went bankrupt when the under-reserved claims matured.

It is deceitful, and therefore unethical, to knowingly misrepresent the quality or quantity of services offered. The client should be made aware of the widely accepted steps in the risk management process and the activities normally associated with each step. The producer/risk manager should make known to the client which of the steps and related activities he or she is both able to and willing to perform.

For the protection of the producer, his or her agency, insurers and the client, the services to be performed should be reduced to writing.

Is it an ethical conflict to be a producer/risk manager? Consensus among those responding indicate that:

This arrangement usually only makes sense for small businesses.

Compensation forms must be fully disclosed to all affected parties.

Proper licensing, if required, must be obtained.

The laws of the jurisdiction in which the risk management activities are to be performed must be followed.

If compensation is paid by the client for risk management services, the producer and his or her agency should not write the insurance.

All client information must be held confidential.

Careful thought must be given to loyalty issues.

The producer/risk manager must be fully qualified and able to serve the role of a true risk manager.

Perhaps most importantly, there should be an agreement between or among the parties as to what services can and will be competently provided.

A producer can be a risk manager for a client, but the activity is fraught with ethical and legal dangers. Not taking a fee or salary from the client does little to relieve the ethical pressures.

Peter R. Kensicki is a professor of insurance at Eastern Kentucky University in Richmond, Ky., as well as a member of the Ethics Committee of the CPCU Society in Malvern, Pa.

Insureds And Vendors

The next "A Question Of Ethics" column, to be published on Oct. 21, will focus on ways to establish your own ethical guidelines, based on a survey created by the Independent Insurance Agents of Texas.

As for the next ethical question for readers to chew on, for a change of pace, one reader suggested a topic that addresses the ethics of insureds, as well as vendors used by insurance companies.

"After a property loss is adjusted and paid, the vendor (a contractor, glass company or auto body repair shop) offers the insured a refund or rebate that, at a minimum, covers any deductible. The original estimate of the vendor was competitive with other estimates. Is it ethical for the insured to accept the refund? Does the form of the refund matter to the ethical question? What should the producer or adjuster do if he or she finds out about the refund?"

Please forward your responses to Dr. Peter R. Kensicki at ethics@eku.edu, or Eastern Kentucky University, 107 Miller Hall, Richmond, Ky. 40475-3101. All responses will be kept confidential.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 9, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.