Posted On: October 20, 2004, 1:01 am CDT

Posted By: Mark

As people have noted, unfortunately there has been a mix of clearly illegal acts in the form of bid rigging with the questionable ethics of broker compensation. Spitzer has used the press of the criminal acts to make the other issue sound much clearer and implicitly illegal. There is no real connection though.

The entire compensation program for brokers working on commision results in an obvious conflict of interest - they are paid by the insurance seller and since its often a percentage of the premium, they make more if the insurance costs more. The preferred agreements only reinforce this situation. None of this is a mystery to the sophisticated risk managers and buyers who employ Marsh or other large brokers for placement of P&C coverage. The situation only makes clear the more obvious solution that brokers in these markets should be paid on a fee basis so their interest is clearly alligned with the buyer.

As another note, if these practices are as heavily used as Spitzer states and lead to such poor buying power for clients, why has the insurance market (other than right after 9/11) been so soft and under such price pressure for so long. The end result has been that brokers have been getting good pricing for the insurance. This is written from the perspective of someone working for a major P&C insurer, not a broker by the way.