RIMS: Broker Probe Won't Change Much

"Our statement is that we support transparency, we support communication between broker and client, and we believe that contingent fees are to be disclosed when the client wants information about them, and that the broker ought to provide information that is appropriate for the client," said Janice Ochenkowski, vice president of the external affairs committee for New York-based RIMS and senior vice president, risk management with Jones, Lang LaSalle in Chicago, a commercial real estate company.

Ms. Ochenkowski added that RIMS has provided its members with guidelines through its Quality Improvement Process. Those guidelines include "the risk manager asking about contingent fees and understanding the impact it may or may not have on his client's account."

The use of contingency fees is currently under investigation by the California Department of Insurance and the New York Attorney General's Office. Their recently disclosed inquiries were kicked off early this year after the nonprofit Washington Legal Foundation, based in Washington, D.C., wrote insurance regulators and attorneys general in New York and California.

WLF asked for a probe of what it said was a damaging practice that could result in brokers leading their customers to pay more for unneeded or insufficient coverage from insurers that paid them handsome fees.

Ms. Ochenkowski said RIMS is reviewing its current stand, however, "I don't think there is the presumption that we'll need modifications to it. Most of us were comfortable with the general position then, and we're just looking at it to make sure language remains appropriate."

Lance Ewing, whose tenure as RIMS president ends May 1, said the investigation by New York Attorney General Elliot Spitzer, who has subpoenaed the nation's largest brokerage firms for information, "will enhance the dialogue" as to whether there is a conflict of interest in the payment of the fees.

Mr. Ewing noted that before making a determination on the subject, the risk management community "will need all the information?the entire transaction process and the parts the broker and underwriter play in that process."

Brokers who have disclosed that they have been subpeonaed say that they reveal the fees to customers and contingency payments are a long-standing practice.

Mr. Ewing, who is vice president of risk management for Caesars Entertainment Inc. in Las Vegas, Nev., added that his company's letter to brokers requires the disclosure of contingency fees.

"That is part of our contract agreement," he said. "Most risk managers ought to be inserting that into their broker record letters so that there is full transparency."

Mr. Ewing said that "the onus also sould fall on the broker. This 'don't ask, don't tell' type of thing is not good for all three parties?the broker, the risk management professional and the carrier."

He emphasized that carriers are also part of the situation. "If somebody refused to pay those fees, would that have caused a snowball effect, or would they have been standing outside in the cold with not a lot of brokers bringing them the business?" he asked. "I think they need to be part of the conversation, as well."

Several large insurers have publicly denied that they have been subpoenaed in the New York investigation. However, Mr. Ewing thought otherwise and commented, "obviously they're going to be part of that conversation."

Nancy Chambers, risk manager for the Waterloo Region Municipalities Insurance Pool in Kitchener, Ontario, who will succeed Mr. Ewing on May 1, said RIMS believes that transparency is "the only way to have a good, professional relationship with our brokers."

She said the broker should identify, at a client's request, "the client's insurers with whom they have a contingency or any similar agreement. That way the client can obtain a reasonable estimate of what the contingency revenue is, generated by those agreements," and apply the latest average contingency factor to the respective premiums.

If the estimate is substantial and if the client requests additional information, "We believe the brokers should calculate the approximate contingency revenues by the carrier and provide the client with the aggregate total of their calculations," she added.

Contingency fees have been the subject of criticism for years within the insurance industry. The payment arrangements with insurance companies are in addition to commissions that brokers receive. The fees are based upon the amount of business or the quality of business that a broker places with an individual company.

In 1998, the activity was the subject of a letter from the New York Insurance Department warning brokers that undisclosed contingency fees might be illegal. After pressure from RIMS, Chicago-based Aon, New York-based Marsh and London-based Willis all agreed disclose fees. A California public interest lawsuit in 2000 that was filed against the three brokers over the fees was quietly settled out of court.