What's A Broker Worth?

Whenever it comes time to report on the state of the market, I feel like National Underwriter has a split personality, given our diverse readership.

We pride ourselves on being the national newsmagazine for the entire commercial insurance community–carriers, agents and brokers, and risk managers. These readers share many common interests, but no single topic spurs more intense scrutiny than talk about pricing, terms and conditions.

Here is where our readers part company, with one's view depending entirely on what role they play.

For example, this week, our cover story focuses on the state of the market–from the intermediary's perspective. With prices at best still flat for most and falling for many, and plenty of cheap capacity available, the cover headline reads: “Party Poopers!”

Had a risk manager written that headline, however, it would have read “Party On!” since it remains a buyers' market.

With underwriting results deteriorating rapidly and surplus evaporating, at this point in the cycle sellers expect prices to rise. But thanks to widespread layoffs, plant closings and bankruptcies, insurable exposures are disappearing. Meanwhile, the absence of a major disaster has spared the industry any catastrophic losses thus far.

It's simple supply and demand. With shrinking exposures and excess capacity, prices are still falling. In a perverse way, that is bad news for agents and brokers, who have seen premiums plummet for years, taking commission income down with them. Yet that is good news for their clients.

This is always an awkward situation for producers, whose job is to secure the best coverage at the lowest cost. But how long can agents and brokers survive in such a price-sensitive environment, yet continue to deliver all the services demanded of them?

Keep in mind that the best agents and brokers are more than just price-shoppers and policy-peddlers. They help clients prepare their pitches for coverage, avoid losses and get their claims paid.

Even in a relatively soft market such as this one, our Buyers Report inside cover story on page 19 warns that terms and conditions may yet require some tough negotiations. The input and expertise of a savvy broker are critical there.

So how are agents and brokers to be compensated for all the work they do?

While producers are happy to deliver cheaper deals for clients, they have to make a living, and that's getting increasingly difficult with commission revenue drying up. Indeed, it's counterintuitive to expect intermediaries to hustle for the cheapest price and then be “rewarded” with a lower commission, but that's how the traditional transaction works.

That is likely to change, although slowly. More and more middle-market agents and brokers are switching over to a fee basis for their risk placement efforts, or are at least charging separate fees for what used to be routinely thrown in as value-added services.

Given all the angst about contingency commissions–essentially bonuses to brokers for delivering a certain volume or quality of business to carriers–this compensation evolution should be welcome.

What I'm hearing, however, is that many buyers find fee negotiations just another complication in placing their insurance, and most would rather just let compensation be worked out between the broker and insurer–although more are demanding full disclosure of the details so they can be assured their deal is on the up and up.

How this plays out over the next few years will be one of the defining issues of broker-client relations. How do you think compensation should be handled?

Sam Friedman
Editor In Chief