Despite Scandal Brokers Will Still Profit

Despite Scandal Brokers Will Still Profit

NU Online News Service, Oct. 22, 2:22 p.m. EDT?Ending broker contingency agreements and incentive payments would not mean fatter profits for property-casualty insurers, and brokers will still make money, according to analysts at Morgan Stanley.[@@]

The firm said their outlook for the sector is decidedly cautions.

Eliminating the broker fees would not add to insurers' balance sheets "other than the immediate term (where timing differences could help insurers). Several brokers have stopped accepting payments, but we don't think insurers should start licking their chops," Morgan Stanley said.

The firm said it believes the brokers will find other ways to be compensated for their services. According to Morgan Stanley, in some cases the contingency commissions were simply loaded into the premiums at the outset, meaning premiums will decline if the practice is stopped.

Morgan Stanley noted also that related competition will compete away any erstwhile gains.

Analysts said that "with premium rates falling, interest rates projected to rise, accident year underwriting margins peaking, and valuations not overly attractive (adjusting for a potential rise in interest rates), we believe the group could underperform the S&P 500."

The firm said 37 of the 61 insurance groups with statutory surplus greater than $1 billion paid some form of contingent commissions in 2003. Confirming what insurers and brokers have said?that the practice is widespread and "standard."

According to the analysts, the top paying insurers of incentive contingency commissions as a percentage of direct premiums include Chubb, Cincinnati Insurance, W.R. Berkley, St. Paul Travelers and Allstate.

Morgan Stanley said it found that most of the top writers pay between one percent and two percent of direct premiums in contingent commissions.

Although Marsh brokerage has been accused by the New York attorney general's office of taking the commissions as kickbacks from insurers in a scheme to rig bids and fix and inflate prices, analysts at Morgan Stanley said they are not aware of any allegations that these contracts are illegal, though in some cases they are alleged to have motivated illegal behavior.

"We are inclined to think the first course of correction will be disclosure, followed perhaps by different forms of compensation over time," analysts said.