BOSTON–Public risk managers responsible to taxpayers need to take extra precautions when it comes to broker transparency, Katherine M. Peeling, outgoing president of the Public Risk Management Association (PRIMA), said in an interview.
Ms. Peeling spoke to National Underwriter at the PRIMA annual conference here where William Kostner, risk manager for the City of Lincoln, Neb., will be installed as PRIMA president tomorrow.
"Being in government, we have to be so transparent about everything," she said. "Public risk managers have to be extremely careful with their transactions because they are dealing with tax dollars. We have to try to spend them as wisely as we can."
Ms. Peeling is risk manager of the school system in Anne Arundel County, Md., which is self-insured.
"The whole concept that you never knew what you were paying was something that, when I worked for a county that bought insurance, would get under my skin," she said.
Ms. Peeling added that "when we went out to the market for a broker, we would try to structure it in such a way that there was a fee for providing the service–but I never really knew if they also got a contingency fee, too."
She remarked, "The intent was to pay for the service of placing it, and not a fee. I always thought it was contrary to common sense that they were working in the client's best interest." Having someone familiar with the markets, who has relationships with the underwriters, "is worth a fee, absolutely," she emphasized, "but from the client–you're paying them for a service."
Before the investigations by then New York Attorney General Eliot Spitzer that revealed broker-insurer bid-rigging and hidden fees, "you never really knew if there were kickbacks going on," she said. "So I was kind of elated to see it all come crashing down because I thought that would force transparency, or at least to a much bigger degree–I personally don't have a high trust level for people who make money off my money."
Ms. Peeling added that, although PRIMA has debated the issue of whether brokerage contingency fees of any type should be allowed, it has not yet taken a formal position.
She said that before the Spitzer investigations, many risk managers had their suspicions as to "what was going on, but how could you prove it? But when it all came crashing down, I thought, 'It's about time.' You just can't operate that way."
She advised public risk managers to be more forthcoming with their brokers and "spell out exactly what kind of services–and expect that they would have to pay for some of those services. There's no such thing as a free lunch, we all know that."
Sarah Perry, incoming president-elect and risk manager for the city of Columbia, Mo., said her broker, one of the big-four, operates on a fee basis, "so that takes care of the commission issue. They don't get any commissions, but they do let us know when they have placed through a placement group," which are often paid by commission.
She added, "I've discussed this with our finance director and city manager. They're fine with this, as long as they know where that is happening."
Ms. Perry said that 10 years ago, her broker did work on a commission basis. "That was one of the first things I changed."
She agreed that public risk managers need to be making more demands, but that because of the size and structure of some entities, "some of the people who handle the risk management function–whether they're called risk managers or whether that's just part of their job–aren't educated enough to make the demands."
She explained that because risk management is only a portion of their job, "they often don't know what to ask for. They could be a city clerk or in some other job."
She added, "Hopefully, if they attended conferences like PRIMA and their local chapter meetings, they would become more educated."
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