RIMS Leaders Scold Brokers and Risk Managers

The comments by Susan R. Meltzer RIMS past president and Ellen Vinck, in-coming RIMS president overshadowed the remarks by brokerage executives Michael G. Cherkasky, president and chief executive officer of Marsh & McLennan based in New York, and Patrick G. Ryan, executive chairman for Chicago-based Aon.

Both men said their companies have ended the behavior that made them the target for action by investigators.

Ms. Meltzer, assistant vice president of risk management for Sun Life Financial, blamed the lack of candor on the part of the brokerage community for the scandal it is facing over accusations of contingent fee abuses.

"Secrecy on the part of brokers is the primary cause for the erosion of confidence that exists today," she noted.

Ms. Meltzer, who fought for contingency fee disclosure during her tenure, faulted brokers for not fully revealing fee information when it was asked for. Regulators also came in for criticism for failing to uncover the acts of abuse early on.

New York Attorney General Eliot Spitzer began revealing misdeeds by commercial insurance brokers on Oct. 14, 2004 when he sued Marsh & McLennan alleging the company rigged bids and fixed prices with cooperating insurers in exchange for lucrative incentive fees labeled placement commissions. MMC settled the case for $850 million without admitting guilt.

Mr. Spitzer said then he thought such activity was pervasive in the insurance industry and released the contents of company e-mails revealing bid rigging and steering of customers to selected insurers.

But Ms. Vinck, vice president of risk management for United States Marine Repair, Inc., said that she did not feel that there is dishonesty in the insurance industry.

"I disagree with Spitzer," she said, "this industry is not ripe with corruption."

However, she said the brokerage firms have given critics "the bullets" to intensify their criticism of the industry.

Ms. Vinck faulted risk managers for not pushing for greater fee disclosure and "insisting on the information and understanding it."

"You need to drive it in the right direction," she told risk managers.

On the subject of fee payments, she said there should only be one model, and that is payment by the buyer for services.

"The model should be that brokers are paid by one source and that is the client," she said. "You represent us, and you must make sure that our interest is first and foremost."

But, she reminded risk mangers of their responsibility in the process, "It is incumbent upon us, and no one else but us, to see this happens."

For their part, both Mr. Cherkasky and Mr. Ryan said their firm's will now fully divulge those drivers of insurance placement. Both companies have agreed to disclosure requirements as part of their settlements with Mr. Spitzer's office.

Mr. Cherkasky said Marsh "stumbled and stumbled badly," adding, "We will make sure it never happens again."

"This industry is going through tumultuous change and change is an ally, not an adversary," said Mr. Ryan.

On the subject of contingent commissions, however, Mr. Cherkasky and Mr. Ryan parted ways, with Mr. Cherkasky saying the fees should be stopped throughout the industry, while Mr. Ryan said market forces should decide whether a buyer wants to use a broker who receives them or not.

Both heads of the brokerage firms said they have instituted internal controls to ensure that the alleged fraud and abuses that have taken place will not happen again.