RIMS Finds MMC Commission Enhancement Acceptable

The Risk and Insurance Management Society Inc. said it finds nothing to object to in yesterday's announcement by Marsh & McLennan that it plans to seek enhanced compensation from insurers.

In a statement, the New York-based association said, “Transparency and client disclosure are the cornerstones of RIMS' position on broker compensation. Marsh's announcement that it will accept enhanced commissions on midsize and small commercial accounts in the United States describes a program that is in accord with RIMS position.

“We look forward to reviewing the full details of Marsh's enhanced commission program. In particular, we need further clarification on disclosure and assurance that full disclosure on all commissions takes place in advance of transactions, ensuring adequate time for the buyer to determine if the proposal is acceptable.”

The comments came after yesterday's announcement by MMC President and Chief Executive Officer Michael G. Cherkasky that its insurance brokerage firm Marsh is discussing with insurers the payment of enhanced commissions on small and midsize commercial business. Mr. Cherkasky said the payments would be fully disclosed to clients and would not be accepted if clients objected.

The news came after MMC reported third-quarter revenues for its brokerage unit were flat. Operating earnings per share were almost half what investment analyst's expected. MMC reported operating earnings of 15 cents a share while consensus estimates stood at 31 cents.

David Small, an analyst with Bear Stearns, said in a note that the firm was lowering its fourth-quarter and 2008 estimates “after another disappointing quarter [because] it is increasingly clear that profitability at Marsh is deteriorating faster than expected and will take longer to turn than we had anticipated.”

Mr. Small noted, “We never anticipated a quarter where a Marsh unit actually lost money.” He added that profitability could fall “further and faster than anyone expects.”

Some of the MMC plans to return to profitability laid out in its latest report make sense and should produce results, said Mr. Small. He cautioned that some savings the company plans may not hit the bottom line due to increases in bonuses to keep key personnel.

Standard & Poor's Rating Service today placed MMC's “triple-B/A-2″ rating on credit watch with negative implications.

Steven Ader, an S&P credit analyst, said in a statement that though management is addressing its earnings issues on the brokerage side, “we believe the adverse financial and competitive effect has the potential to materially delay the improvement in operating results incorporated into the current rating. The severity of this development might indicate that the oversight of the operating units by executive management is not as robust as envisioned in the current rating.”

Concerning the ramifications of the commissions on the rest of the brokers, Robert P. Hartwig, president and chief economist for the New York-based Insurance Information Institute Inc., said the fact that the commissions will be fixed rate and fully disclosed to clients meets the terms of the agreement the firm made with New York's attorney general back in the beginning of 2005.

Marsh, along with Aon, Willis and Arthur J. Gallagher, agreed to no longer accept contingent commissions after allegations surfaced that the fees were used as kickbacks in return for steering business to certain insurers.

He said it is too soon to tell if the enhanced commissions will have any effect on the rest of the brokerage community.

“Marsh wants to see the playing field leveled,” Mr. Hartwig said.

However, it is obvious Marsh has been operating at an economic disadvantage compared to other producers writing midsize and small commercial accounts, he said, and the enhanced commissions may indicate that carriers are willing to recognize this.