Marsh Still Struggling After Loss Of Fees

He noted that Aon, one of Marsh's chief competitors, has effectively restructured itself and become more efficient, but it took years to achieve.

Customer satisfaction is another issue for Marsh to overcome. An analyst's note from Brian Meredith, a UBS Securities analyst, cited a survey of risk managers by the firm. Of those surveyed who said they had service issues with their broker, many pointed to Marsh as having significant turnover and/or service problems. Mr. Meredith said this is something Mr. Glaser will need to address immediately.

Mr. Meredith commented that while the survey showed risk managers saying that service fee increases appear to be moderating, the issue will be particularly important to Marsh, "where margins are currently inadequate in this segment."

"Marsh will be in a grind for awhile," said Mr. Small. "The biggest problem is not how they will be paid, but their ability to improve the cost structure and retain clients."

On the overall issue of compensation within the industry, Mr. Small said he believes the status quo will remain and there will not be a lot of change in the future.

Wayne Walkotten, senior vice president for the consulting firm Marsh, Berry & Company of Willoughby, Ohio, said despite the investigations and agreements to give up contingency fees by the major brokerages, there does not appear to have been any clear moves to change the way the industry compensates most of its producers.

However, there is a greater burden on agencies and brokerage firms alike to prove they are providing value for whatever services they offer, he suggested.

"You have to operate in an era of disclosure, demonstrate your value to the customer, and let the free market work accordingly," said Mr. Walkotten.

Robert Lieblein, managing principal with Hales & Company in Harrisburg, Pa., said that when both Travelers and Chubb changed their compensation structure to eliminate contingents, there was thought that others would follow, but that has not happened and probably won't anytime soon.

"It is still early, and I think the markets and compensation will continue to evolve," said Mr. Lieblein. "I don't see revolutionary change, but it will be an evolutionary process," although he added he could not predict where that evolution would lead.

"I don't believe it will change a whole lot from where it is now," observed Kevin Stipe, a senior vice president and principal with Reagan Consulting in Atlanta, which developed and produces the "Best Practices" survey and support program for the Independent Insurance Agents and Brokers of America.

Mr. Stipe believes the two-tier system that exists will remain–with the four major brokerages unable to accept volume-based contingent deals, but the remainder of the commercial agency and brokerage firms receiving an array of contingency fees.

The main reason for this, he said, is that major brokers deal primarily with large accounts, with rates, fees and compensation aggressively negotiated. For the others–primarily those dealing with midsize and smaller commercial accounts–compensation is primarily commission-based, and will remain so. "Absent an outside political intrusion, it is a system that will find the right balance," he said.

Chris McShea, a partner in the insurance advisory practice with Ernst & Young, said "the uneven playing is creating more intense competition than you would see historically, and that doesn't bode well for the future metrics of the market."

To compete, he said the larger brokers will take a consultative approach to their large accounts, and begin focusing that system on midmarket and eventually even small-market clients.

They will do this to drive home their worth to clients–such as in providing loss prevention services–with not only buyers, but with insurers recognizing the value in mitigating losses.

On the political side, there is no contemplation of regulating broker compensation at the federal level, according to Joel Wood, senior vice president of government affairs with the Council of Insurance Agents and Brokers.

However, anxiety remains over the notion of greater transparency within the brokerage industry because regulators have not adopted uniform standards, he noted.

Pennsylvania is the only state to accept the National Association of Insurance Commissioners' model law for disclosure, he said, and so long as that benchmark is not more widely adopted, "anxiety remains."