Brokers Voice Pain Over Probe Fallout

Brokers Voice Pain Over Probe Fallout

By Mark E. Ruquet

NU Online News Service, Dec. 15, 4:15 p.m. EST?Ongoing investigations of insurance brokerage business practices has brokers worried the fallout will create financial burdens for both clients and themselves, hurting smaller brokers the most, a consulting firm survey has found.[@@]

According to the report by New York-based Advisen Ltd., brokers said they are reluctant to scrap the entire contingent commission fee structure and that smaller brokers, who are more reliant on these fees, would suffer the most if companies drop the commissions.

Besides poll statistics the company included some brokers' impassioned comments on the topic that has roiled the industry since New York Attorney General Eliot Spitzer accused Marsh brokerage in a civil suit of taking kickbacks disguised as fees to rig bids and steer business to insurers.

David Bradford, executive vice president with Advisen, said the results of the survey are based on a series of question and comments from 135 senior management brokers who responded to a Web-based survey over a two-day period in November.

Of the 135 respondents, 64 percent, or 86 individuals, were members of the top 100 commercial insurance brokers. Nearly half of the 86 respondents were from the four largest brokers.

Mr. Bradford pointed out that 65 percent of the respondents feel they now are obligated to enhance their disclosure with their clients, while 16 percent of the brokers decline to answer the question.

He said it was unusual that so many would not answer a question. The remaining 19 percent said they did not feel the need to enhance disclosure. Nearly 77 percent said they anticipate higher transparency would be required in the industry.

The vast majority, 92 percent of respondents, felt that state regulators would require greater disclosure.

"The point is clear that brokers are feeling pressure now," Mr. Bradford suggested.

In comments Advisen received as part of the survey, brokers said that the total cost of risk would increase or stay about the same.

Mr. Bradford said the brokers indicated they feel they should be compensated for their work and that it is only a question of whether the income is from the client or the carrier in the form of traditional commissions. Their feeling was similar to the response of over 700 risk managers in a survey released by Advisen in November.

Both survey groups indicated they feel the cost of risk will remain the same, or increase, because broker fees would be passed onto clients.

Whatever fees brokers do pass on, Mr. Bradford said, brokers feel revenues will either decrease or stay the same.

"There is a very strong concern, from the comments we received, that they feel it will be very difficult to make up income," he said. "And that could be fatal to smaller brokers who rely on this income."

Besides the standard question and answer section, where the statistics were drawn, the survey allowed for brokers to submit anonymous, written comments, Advisen said. In the comments, brokers blamed a few for the damage to the industry and to their reputation.

"Contingent income was not a conflict for 99.9 percent of insurance brokers in the country who always strive to serve their clients' needs," said one anonymous comment released by Advisen.

"I think there is an unintended consequence?less competition," went another comment. "The smaller brokers and agents will be driven out of business if they lose contingent income."

Mr. Bradford noted that the comment section was included because in the survey of risk managers they were inclined to make "copious and impassioned comments," despite the fact that there was limited space for comment. In this survey, the firm wanted to make sure respondents had ample opportunity to comment.

"In every case, we came up with deeper insight into the issues," he observed of the comments. "It became clear what is on the mind of the marketplace."

"There was unanimous opinion among the brokers that they did not believe [bid-rigging and other market abuses of contingent commission fee placements] was happening in the industry," he continued. "They believe there may be a few incidents, but it is not a pervasive practice in the industry."

Mr. Bradford also noted that the response rate for the survey was very high at 18 percent, where the classic response rate is somewhere in the single digits.

"It is indicative of the level of importance brokers attach to this issue and this survey has given them a way to express that."