It Matters Who Pays
Imagine a world without broker contingency fees. Better yet, what if the commission system was eliminated entirely?
"We've come a long way from the days when brokers said their compensation was none of your business to the transparency which continues to evolve today," says John Sinnott, a senior advisor to Marsh & McLennan Companies who served asthe brokerage's chairman and CEO until he retired in 2003.
However, Mr. Sinnott touched a nerve during his keynote address in Bermuda last week at the World Insurance Forum when he reported that one underwriting giant had suggested if contingency fees were stopped cold, somebody would have to pay the difference most likely the buyer.
Ellen Vinck, vice president of risk management for U.S. Marine Repair in Norfolk, Va., begged to differ during a panel discussion following his speech. "We're already paying these fees," she insisted. "It comes out of our premium."
Lance Ewing, vice president of risk management at Caesars Entertainment in Las Vegas,the panel's moderator, took the argument a step further, warning that "if contingency fees go away, then I expect carriers to reduce my premiums because they are no longer paying brokers that additional compensation."
However, Mr. Ewing, immediate past president of the Risk and Insurance Management Society, conceded there might be unforeseen consequences if contingency fees were dumped. "Do certain broker services go away or get charged for if these fees are no longer there to support such activities? Brokers need to quantify where these fees are going," he said.
During the Q&A, I threw more gas on the fire by asking whether contingency feeswere part of a bigger problem: Does the fact that brokers are paid commissions by insurers to sell their products create an inherent conflict? If buyers negotiated and paid brokerage costs directly, wouldn't that end all doubts about an intermediary's loyalty?
Ms. Vinck, in line to become president of RIMS, rose to the challenge. "As a risk manager, I am not opposed to the elimination of commissions and paying brokersdirectly to be my advocate," she declared. "I have no problem with abolishing commissions 100 percent and paying for broker services myself."
In response, Mr. Sinnott said that "if certain sophisticated buyers want to move more toward a fee or a negotiated commission basis, that's fine." However, he added that buyers without risk managers might lack the wherewithal or inclination to deal with the details of broker compensation.
No matter how the government probes prompting this debate come out, Mr. Ewing thinks further changes in standard operating procedure are inevitable."The 'we ask, you tell' approach is going the way of the dinosaur," he said. "We shouldn't have to go looking for this information. Brokershave to tell us up front automatically how this works. The disclosure bar has been raised."
My advice would be for risk managers to hire their brokers outright and negotiate their placement fees whenever possible. In the end, that's the only way for a buyer to know for surea broker is solely looking out for their interests.
If they don't feel capable of or interested in rocking the boat to that extent, fall back on the old sawcaveat emptor. Don't letbrokers off the hook with a boilerplate disclaimer. After all, risk managers are ultimately the ones accountable for the policies they buy, as the World Trade Center coverage debacle demonstrated.
Sam Friedman
Editor-In-Chief
Reproduced from National Underwriter Edition, June 11, 2004. Copyright 2004 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.
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