Smoother Ride For 2006?
This year has been one rocky road for commercial insurance buyers–and I'm not talking about the ice cream. Things began to heat up about a year ago, when a certain state attorney general decided enough was enough and began investigations into broker bid-rigging and contingency fee abuse.
Some buyers were left wondering where their broker stood. Those buyers who trusted and stood behind their broker still had to answer questions from upper management.
As improprieties were uncovered at some of the nation's biggest brokerages, insurance buyers went from stunned to angry. In fact, a survey of buyers by Advisen, Ltd. in May 2004 found that risk managers were dissatisfied with the level of disclosure from their broker about compensation. Last November another survey found that buyers were angry about anti-competitive and possibly illegal practices of brokers.
The most recent survey, released earlier this month by Advisen, found that for the most part buyers are satisfied with the steps their brokers have taken toward transparency. They are, however, unhappy with insurers that may be "pocketing" contingent compensation money that previously went to brokers.
One troubling finding was the fact many survey respondents noted that they had tolerated contingent commissions–saying their firms were none the worse for it. Perhaps the investigations have pointed out the dangers of this type of arrangement.
But many of those surveyed have taken positive steps. Thirteen percent have altered their broker relations as a result of the investigations by New York Attorney General Eliot Spitzer, while 15 percent indicated they planned to begin replacing their broker during the next 18 months. Another 18 percent were unsure whether their firm would retain the services of a broker at all. More buyers are working directly with insurers and many have spread their business among several brokers.
More than ever, buyers are an integral part of the industry's "three-legged stool," made up of the buyer, broker and carrier. In fact, buyers I've talked to have become more proactive with their brokers and insurers, setting their terms and demanding transparency. They also are meeting face-to-face with carriers more now than in the past.
They weathered the hard market following Sept. 11, 2001 and steeled themselves for the eventuality of another hard market, perhaps triggered by this year's catastrophes. They've done this by warning upper management of possible rate hikes, and most I talked to have planned ahead by negotiating two- and three-year deals on major coverages.
They are savvy and alert on terms and conditions and they've researched the alternative market for difficult exposures. Many large, and more and more midsize organizations have formed captive insurers.
Hopefully by the time their renewals come around again the dust will have settled enough so buyers have an idea of what to expect.
And as if the broker situation weren't enough, buyers have faced multiple hairpin turns with Hurricanes Katrina, Rita and Wilma, not to mention a few tornadoes and other disasters thrown in along the way. All this has led to an uncertain 2006 renewal period. According to several sources I spoke to at the recent Property Casualty Insurers Association of America annual meeting, buyers can expect some hardening across all lines–not just property.
So how have buyers emerged overall? I'd say this is their Grand Prix race and they are out in front. This being the insurance industry, however, means it undoubtedly will be a long and winding road, but it looks like corporate buyers are more than ready for the challenge in 2006.
Caroline McDonald is a Senior Editor at NU. She may be reached at cmcdonald@nuco.com.
Quotebox, with Caroline's mug:
"Buyers have become more proactive with their brokers and insurers, setting their terms and demanding transparency, and are meeting face-to-face with carriers more now."
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