Willis Abolishes Contingency Fees

Willis' statements came this morning during an investor's conference call hosted by Willis' Chairman and Chief Executive Officer Joe Plumeri. He said the broker is abolishing the practice of contingency fees and restructuring its compensation structure so the fees are no longer tied to volume considerations and placements.

Willis is one of the brokerage firms subpoenaed by New York Attorney General Eliot Spitzer in an investigation that has led to the filing of a civil lawsuit charging that the Marsh McLennan brokerage subsidiary Marsh arranged to fix and inflate commercial insurance prices and rig bids with major insurers in exchange for payoffs disguised as fees.

"The insurance brokerage industry is facing the greatest challenge it has ever confronted," said Mr. Plumeri. "It is a crisis, and how we respond to it will define this industry for many years to come. It is now time for change to come to the insurance brokerage industry."

"We are abolishing the practice of contingents at Willis," he declared.

In 2003 Willis reported revenues of $2.08 billion. Marsh, which calls the fees market service agreements, discontinued them last week. MMC said in the first half of this year that fee revenue was approximately $420 million, which was 11 percent of risk and insurance services revenue.

Mr. Plumeri said, "Our clients don't like contingency agreements," and "we have listened to our clients and heard them loud and clear. They want contingencies to end and we intend to respond to that. It's over."

When asked later if there would ever be a time where the firm would reconsider reinstituting the fees, he gave an emphatic "No."

The abolition of the fees could affect $160 million in earnings for 2004, he said. Of that total, $80 million is in what he termed as traditional contingency fees in North America, which the firm is abolishing immediately.

He said the company would make up this revenue through gains in market share. The remaining $80 million relates to fees for services on business outside of North America, with some relation to volume. These contracts would be re-written so payments are made based on a schedule of services rendered. He said the remaining agreements would be unwound by the end of the year.

The changes would not alter any services the broker provides clients today, he added.

Mr. Plumeri said that after spending "a lot of time with clients" who "are appalled" at Attorney General Spitzer's allegations that Marsh rigged contract bids and tied insurance placements to other business, the firm decided to make the change.

Willis is also issuing a customer's bill of rights that pledges ethical business practices, including a toll-free number for customer complaints. The bill of rights reflects practices the firm already follows, he said, but putting it in writing gives it greater emphasis.

On the matter of the ongoing investigation by Mr. Spitzer's office, Mr. Plumeri said Willis has performed "a thorough" investigation and has uncovered no evidence of bid rigging or tie-ins on a corporate level. He added that, "in an organization with thousands of employees and 300 offices worldwide, it is impossible to account with certainty for the conduct of every single employee in the company."

He continued, "In the course of responding to the New York attorney general's subpoenas, we have reviewed our internal practices and tens of thousands of e-mails, and we have found no evidence of the practice of bid rigging at our company.

"If we ever do find that someone has engaged in conduct such as bid rigging, we will take swift action. Such conduct would violate everything we stand for at Willis, which is to do what is in the best interests of our clients, and it simply would not be tolerated."

He said the firm is continuing to cooperate in Mr. Spitzer's investigation.

In response to a question on the recent announcement that California's Insurance Commissioner John Garamendi will file his own civil action against still-unidentified insurance interests, Mr. Plumeri said Willis has had little contact with that department.

In response to another question about the industry itself, he said there should be one individual regulator, similar to the nation's banking system. He called the current system of state regulation "Byzantine" and "ridiculous," driving up costs that would be reduced in a federally regulated system.