Buyers Wary But Forgiving With Brokers

However, the good news for brokers is that risk managers seem to have put concerns surrounding contingent commissions and other practices behind them.

"What surprised me was the 180-degree turnaround in the buyers' attitudes toward disclosure and compensation," said David K. Bradford, editor-in-chief of New York-based Advisen, Ltd., who co-authored the briefing on the survey results.

In prior surveys, he told National Underwriter, "the majority of respondents said they did not get adequate disclosure out of their brokers, and they did not really understand what the compensation structures were, to their satisfaction."

What came out of this survey, he said, was a "very different story. The vast majority of our respondents said they did get adequate disclosure from their brokers."

He attributed this to a number of factors, beginning with Mr. Spitzer's investigation, which exposed brokers rigging bids to steer accounts to favored insurers to help secure volume-based bonus commissions.

"I think the buyers finally found a voice, in a sense, to express what had individually been grievances, but now was a collective demand on the brokers to improve in this area," according to Mr. Bradford.

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 intermediary.

Mr. Bradford said brokers with larger programs often are "splitting the individual program, conceivably between two brokers."

They may also, for example, "give the professional liability piece to one broker and the property and general liability piece to another broker."

The idea here, he said, is to "not have all your eggs in one basket" and stir up competition among the brokers. They also want to make sure they are getting the best terms, he said.

Some risk managers, Mr. Bradford noted, were adamant about conveying that "the best risk managers had been doing these things all along," following best practices.

A large percentage of risk managers said their relationship with brokers was changing in more subtle ways, the survey found.

For example, nearly 40 percent of the risk managers surveyed are now independently verifying the information provided to them by their broker. They also 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 the overall speed and efficiency of insurance transactions.

"The situation seems to be trust, but verify," Mr. Bradford said in a statement. "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."

The study found that on the one hand, risk managers were satisfied with industry reaction to revelations about compensation practices and chose to participate in the settlements between major brokerages and Mr. Spitzer.

On virtually all compensation issues, risk managers overwhelmingly sided with their broker, saying their broker adequately discloses 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.

On the other hand, Advisen said, disclosures about alleged bid-rigging and steering of programs to select insurance companies have led to activism in the placement process.

Thirteen percent of risk managers have already switched brokers, with another 30 percent considering doing so in the next 18 months, the study found.

Whether asking for proof that their insurance was competitively bid, or reviewing quotes with the insurers themselves, many buyers said they are more directly involved than before the Spitzer investigations.

A common complaint among risk managers, who commented anonymously, was: Why haven't insurers reduced their premiums by the amount that was previously paid to brokers in the form of contingent commissions? (A number of major brokerages–including Marsh, Aon and Willis–swore off such deals after the Spitzer probe.)

This is the third survey of risk managers on contingent commission issues conducted by Advisen.

The first was taken in May 2004, shortly after Mr. Spitzer announced a probe of broker compensation practices. Key findings from that survey were that two-thirds of risk managers regarded contingent compensation plans as a conflict of interest for a broker, while over 80 percent were less than fully satisfied about the level of disclosure they received from their broker on compensation.

The second survey, conducted in November 2004, addressed commercial insurance buyers' view of insurance brokers. In those survey results, risk managers expressed anger over the potential illegal and anti-competitive practices alleged in the Spitzer suits. They also advocated new transaction models involving greater transparency. Few called to end contingent commissions, however.

Mr. Bradford said the sentiments of risk managers have "clearly evolved since we first surveyed the market, and will certainly continue to evolve."

He said the constant expression across the 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 managers 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 at jcohen@advisen.com.

Flag: Key Findings

Head: What Are Buyers Saying?

Among the most revealing results of the poll of over 500 risk managers in the private and public sector:

o Nearly 40 percent are now independently verifying the information provided to them by their broker.

o About 60 percent feel that further standardization in the placement process would improve the overall speed and efficiency of insurance transactions.

o Thirteen percent have already switched brokers.

o Thirty percent are considering changing brokers in the next 18 months.