Marsh & McLennan's chief executive, whose firm has stopped accepting contingent commissions, predicted today at an industry conference that big brokers that continue to accept them will face a disadvantage.
Coming the day after reporting MMC's fourth quarter returns, Michael G. Cherkasky, MMC's president and chief executive officer, said the fact that Marsh, MMC's insurance brokerage arm, no longer takes contingent commissions means the broker will be forced to market its services on a value-added basis to grow its business.
He said clients will come to view brokers who accept contingents negatively, and Marsh will work to take advantage of that view.
MMC was one of the four major insurance brokers that agreed to abandon taking contingent commissions after investigators charged they were used by insurers as kickbacks for broker participation in bid-rigging and steering of contracts.
Mr. Cherkasky's remarks today came during the Merrill Lynch Insurance Investor Conference broadcast over the Internet.
In response to a question he also commented on about American International Group's recent agreement to give up payment of contingent commissions on one line of business, Mr. Cherkasky said that it did not mean much to the industry.
He said AIG's agreement, which settled allegations of accounting irregularities and forced the company to pay a $1.64 billion settlement, was only good for three years and only covered excess casualty.
For the major brokers, said Mr. Cherkasky, "contingents are not a best practice," when it comes to smaller insurance agencies "it's a different value proposition."
Marsh and three other brokers' contingent agreements were based on the volume of business placed with certain carriers. Most agency contingent commissions are based on the profitability of business placed with a carrier.
Commenting on the health and future of MMC, Mr. Cherkasky said its Marsh brokerage unit is seeing improved signs in its business. Account retentions were up in the fourth quarter, and for the first time since the scandal hit a year ago, the broker saw net new business in January along with improved retentions, he said.
"Where we are going is fairly predictable," said Mr. Cherkasky pointing to the firm's positive financial momentum, "the question is, how fast are we going to get there?"
In an analyst note, David Small, with Bear Stearns, said he was maintaining the investment firm's favorable rating of MMC despite a disappointing earnings report.
For his part, Brian Meredith, an analyst with Bank of America, wrote in his note that MMC should see continued improvements, though he called the company's turnaround slower than expected.
Yesterday, MMC reported fourth quarter net income of $35 million, or 6 cents a share, an increase from a loss of $680 million, or loss per share of $1.29.
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