Survey: Buyers Relationship With Brokers Steadying

In the wake of the brokerage price-fixing scandal, a survey of commercial insurance buyers' reports they are paying closer attention to their broker arrangements and making changes in multimillion-dollar insurance programs.

The findings from a poll of risk managers at more than 500 U.S. and Canadian corporations and government entities were reported by New York-based Advisen Ltd.

Almost half the buyers who participated in the survey said they had made some significant change in the relationship with their incumbent broker--including replacing the broker or re-assigning some portion of their program to a new broker--or are considering a material change in their current broker relationship over the next 18 months, Advisen said.

A large percentage of risk managers said their relationship with brokers was changing in more subtle ways. For example, nearly 40 percent of the responding risk managers are now independently verifying the information provided to them by their broker.

They also said they are taking a more active role throughout the placement process. Additionally, about 60 percent of respondents felt that further standardization in the placement process would improve overall speed and efficiency of insurance transactions.

"The situation seems to be trust, but verify," said David K. Bradford, editor-in-chief who co-authored the Advisen Briefing on the survey results.

Mr. Bradford said, "Risk managers overall feel they have tackled the compensation issue, but clearly regard the placement process as a work in progress, and that will have an effect on their relationship with brokers--and therefore the dynamics of the marketplace--for some time."

Invitations to participate in the survey were e-mailed to individuals identified as commercial insurance buyers in the U.S. and Canada, and 540 responses were received. The survey contained 11 questions/statements with multiple-choice answers and two unstructured sections in which respondents could write-in comments anonymously.

The survey shows that risk managers were generally satisfied with the brokerage industry changes in the wake of charges that major brokerages accepted hidden fees in exchange for steering business to selected insurers and most chose to participate in the restitution settlements brokers arranged with state authorities.

Risk managers surveyed overwhelmingly reported their broker adequately disclosed all compensation received in the placement of programs. About the same number said the level of transparency in the process was adequate or more than adequate.

But, disclosures about alleged bid-rigging and steering of programs to select insurance companies have led to a renewed activism focused on the placement process.

Thirteen percent of risk managers have already switched brokers, with another 30 percent considering doing so in the next 18 months. Whether asking for proof that their insurance was bid for competitively or reviewing quotes with the insurance companies themselves, many buyers of commercial insurance are more directly involved than before the investigations, according to responses.

Risk managers, who commented anonymously for the survey, wondered why insurance companies have not cut their premiums by the amount that was previously paid to brokers in contingent commissions, which large brokerages have agreed to forego.

This is the third survey of risk managers on contingent commission issues conducted by Advisen. The first survey was conducted in May 2004, shortly after New York Attorney General Eliot Spitzer announced a probe of insurance broker compensation practices.

Key findings from that first survey were that two-thirds of risk managers regarded contingent compensation plans as a conflict of interest for a broker, and over 80 percent were less than fully satisfied about the level of disclosure they received from their broker about compensation received from contingent commissions.

The second survey, conducted in November 2004, addressed the issues of how commercial insurance buyers view insurance brokers. In those survey results, risk managers expressed anger over the potential illegal and anti-competitive practices alleged in the suit and advocated new transaction models involving greater transparency. However, few called for the end of contingent commissions.

"The sentiments of risk managers on this issue have clearly evolved since we first surveyed the market, and will certainly continue to evolve," said Mr. Bradford. "The constant across all of our research in this area in the last 18 months has been a uniform desire for better and more efficiently delivered information, which is the ultimate equalizer in the continuous balancing act between risk manager and brokers."

A copy of the full results can be obtained from Advisen by calling Jeff Cohen at 212-897-4820 or via e-mail jcohen@advisen.com.