Who Pays The Piper?
By nature, risk managers are a risk-averse bunch. They are low key, tend to fly under the radar, and go out of their way to avoid controversy. This might explain the glacial pace at which they have responded to the questions raised by broker contingency fee deals with insurers.
It's been the industry's "dirty little secret" for years now that agents and brokers strike side deals with insurers to get bonuses or higher commission rates in return for delivering a certain volume or quality of business. Yet corporate insurance buyers have been slow to react to the practice, which in theory gives a broker an incentive to steer a client astray if it means increasing their income.
Unlike risk managers, brokers usually move fast. Thus, they have been characteristically quick to defend their contingency deals. Brokersthe overwhelming majority of whom are undoubtedly honest and straightforward with buyers, and are beyond compromising their client's best interests for their own monetary gainsay that such fee deals are a long-standing practice and are no secret.
What's more, brokers say, such deals ultimately can benefit clients by giving brokers more leverage with carriers willing to compromise on price or coverage to secure an account with a savvy risk manager and solid loss history.
Still, it wasn't easy to convince brokers to become more transparent with their compensation agreements. The Risk and Insurance Management Society spotlighted the deals back in 1999, and after much verbal jousting, RIMS settled for full disclosureif the client asked about such arrangements, that is.
Now, thanks to probes by New York Attorney General Eliot Spitzer and others, along with policyholder suits challenging such "kickbacks," RIMS was roused to revisit the issue and inched ahead in its disclosure policy recently by recommending that brokers reveal fee deals up front, without the client having to ask about them first. RIMS said brokers should make this disclosure before placing a piece of business.
Marsh, the biggest brokerage, was proactive, launching a new Web site to explain the contingency fee concept, provide sample contracts, list the carriers offering such deals, and most importantly, providing an interactive link to supply client-specific information. Other brokers will undoubtedly follow suit or be accused of hiding something, especially with Mr. Spitzer breathing down their necks.
This is all for the good. Transparency benefits insurance buyers and creates a more competitive and efficient market. Disclosure removes some of the doubts about a broker's motivesbut not all.
Thus, we still have a ways to go. For example, rather than moving incrementally from a "don't ask, don't tell" policy to mandatory disclosure before insurance is placed, risk managers could demand an "opt-in" provision in standard brokerage contracts, requiring a written sign-off by the buyer before a broker can use a client's business to fulfill an insurer fee arrangement.
Even more radical, at some point risk managers should reconsider the entire brokerage compensation scheme. Brokers, in theory, represent clients, but as long as insurers are paying the piper, they get to call the tune.
If risk managers want to change that dynamic, they are going to have to take matters into their own hands and pay their brokers on a negotiated fee basisnot just for extra services such as loss control or captive management, but for insurance placement as well. That's the only way they can be sure their broker is truly working only for them.
Sam Friedman
Editor-In-Chief
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 3, 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.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.