New York–Patrick Ryan, Aon Corp. chairman, speaking at an insurance industry conference, said over the long term brokerages will benefit from a more transparent environment that is being created by investigations of their business.
Appearing at this week's Standard & Poor's annual insurance conference titled "Insurance 2005: Under the Microscope," Mr. Ryan acknowledged that in the short term brokers will be hurt by income lost after investigatory pressure led them to end contingent-fee arrangements
The fees have been dropped by the four biggest U.S. brokers==Mr. Ryan's Aon, Marsh & McLennan Cos., Willis Group Holdings Ltd., and Gallagher. However, Mr. Ryan said brokers will benefit over the long term because of the more transparent environment.
"These were difficult times," said Mr. Ryan, "but we saw them as an opportunity to level the playing field with full disclosure. We liked taking the mystery out of the business."
As a result of New York Attorney General Eliot Spitzer's investigation of brokers and subsequent settlements, clients are now more likely to be informed on the bidding process and methods of broker compensation, Mr. Ryan said.
Mr. Ryan also noted that higher premium commissions are almost certainly in store as some of these brokers seek to make up for their lost contingent-fee income. "Every broker is negotiating higher commissions," he said.
Brokers will also have to match more carefully the costs to expenses in the lines they are brokering, Mr. Ryan advised. "The key is to segment the business and apply the costs to each segment," he said.
Despite the tough year the major brokers have had, Mr. Ryan remained optimistic about their future. In particular, he noted the increasing need for brokers' expert service as business owners face risk management that is becoming more complicated than ever. "The market is so complex," said Mr. Ryan. "The role of the advocate is growing."
S&P director Steve Ader, who participated in a panel discussion with Mr. Ryan, agreed that large brokers have made progress in developing a new business model to replace lost contingent-fee income. "Overall, the industry has done a good job changing its business model," Mr. Ader said.
Mr. Ader forecasted another possible change in the sector's business model. He said that in the past, it made sense for some big brokers to go after smaller clients because in the aggregate, they would unlock volume-based contingent commissions. But now, he said, such small clients would be unprofitable, and, therefore, big brokers might be forced to drop them.
Mr. Adler said that would hurt the big brokers but open up possibilities for regional brokers.
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