Marsh & McLennan Faces Off with Insurance Journal Readers

The street has become a superhighway, far removed from the clubby atmosphere of Los Angeles’ Wilshire Blvd. or New York’s Pine Street. Anybody can now comment on the latest industry happenings over the Internet, and one of the biggest subjects has been the travails of Marsh & McLennan. The recent $850 million settlement with New York State Attorney General Eliot Spitzer triggered a new wave of responses on Insurance Journal’s Web site.

Some industry professionals maintained that Marsh had done nothing wrong, as contingent commissions have long been a major source of revenue for agents and brokers in the commercial insurance market. A greater number, however, expressed little sympathy for the beleaguered giant.

A trenchant comment came from Jay Mack of the Boca Raton, Fla.-based The Mack Group Inc.

“Marsh did nothing wrong? They definitely did something wrong in over charging clients and requesting high quotes to block markets and earn more money. They should have been fined and penalized. They pulled the same stunts on the state of Connecticut and will get nailed there too.”

Given the number of ongoing state investigations, Connecticut is far from alone in seeking compensation from Marsh.

People expressed their lack of sympathy in many ways. Overall they feel Marsh’s actions have given the whole industry a black-eye that it doesn’t deserve. The settlement did little to change those feelings, with most readers expressing the opinion that Marsh got off too lightly.

Typical observations posted to IJ’s Web site were: “Where are the fines? How do I explain all this to my clients? What, if anything, is Marsh going to do to restore the industry’s integrity? Who’s going to compensate the 3,000 people Marsh plans to lay off?”

Not unsurprisingly, given that most of the commentators work in the industry, Spitzer doesn’t come off much better. One reader put it this way: “[I] don’t know what’s worse–Spitzer settling for what amounts to a blackmail payoff, or that if you are a conglomerate you can buy your way out of criminal charges.”

When the Attorney General–to no one’s surprise–announced he would run for Governor of New York, a number of readers took it as sufficient proof that the whole investigation had been politically motivated to begin with.

There’s also been some confusion over what Marsh actually did–aside from bid rigging, which was universally condemned. The indiscriminate use of “contingent commission” causes it. Fundamentally commissions are always contingent, i.e., they are payment in the form of a percentage of the premium contingent upon writing the coverage. It’s a classic method of compensating sales people throughout many industries, including insurance agents.

What Marsh and the other large brokers who handle commercial accounts did, however, differs. As Standard & Poor’s pointed out in their report, “Oligopoly of Insurance Brokers Gives Way to Pressure to Add Value,” they basically accepted money from the carriers based solely on business volume. These were not “base commissions,” as they performed no services. “In other words,” S&P wrote, “insurers paid brokers merely for the right to sell insurance to clients.”

“It was pay-to-play,” stated Donovan Fraser, a S&P’s credit analyst.

While lumped together as “contingent commissions,” the market service agreements or placement service agreements that brokers used to generate those volume-based payments differed markedly from classic commission payments.

So what’s wrong with rewarding companies you do a lot of business with? Several readers questioned saw no real difference between that and giving a large buyer quantity discounts.

There are two distinctions: 1) Big commercial brokers control the market and limit competition through their size; it’s not a free market, and 2) It presents a textbook example of potential conflict of interest. Do you, as a broker, pursue your client’s interest by trying to obtain the best coverage at the lowest rate, or do you tend to try and write business with a carrier that’s paying you money based on the volume you write with them?

Even with a very honest carrier and a very honest broker, the suspicion lingers that the coverage was placed because of the payment. That’s the main reason Marsh and other large commercial brokers quickly stopped the practice when Spitzer’s investigations brought it to light.

Guilty yet not guilty
There’s an underlying current of cynicism in the comments, which Marsh’s settlement with Spitzer only reinforced. It admitted no guilt, although it does make an apology. The main reason for denying responsibility is to protect the company from making a damaging admission that could be used against it in the rash of civil lawsuits that have been filed as a result of the probe. But many readers saw it as simply more corporate weaseling. Basically, if Marsh’s senior management–most of whom have left–wasn’t responsible, who was? It reinforces the sentiment that, as one reader put it, “they bought their way out, and that’s wrong.”

While many readers questioned the size of the settlement–roughly what Marsh made off contingent commissions in 2003–others also questioned whether it made any sense. Marsh’s clients or ex-clients are being asked to prove economic loss, but given that most of them were knowledgeable insurance buyers, who routinely employ expert risk managers, how can they show that they were unhappy with the outcome of their renewal negotiations, when they knew the market as well as the broker did.

Despite the cynicism, neither Marsh nor Spitzer tops the list of the industry’s most despised antagonist. That “honor” belongs to J. Robert Hunter, the director of insurance for the Consumer Federation of America. His statement–that commissions given for steering business to particular insurers could lead to higher rates for many consumers and profit-related commissions “are of even greater concern as they may entice agents or brokers to delay or discourage legitimate claims” filled the street with a veritable traffic jam of comments.

Some of the more polite observations pointed out that anything Hunter says is usually wrong. Many questioned his basic knowledge of the industry he supposedly watchdogs. Agents see Hunter as a combination of Darth Vader, Hannibal Lecter and Benedict Arnold. This is a sure sign that anything he writes in the future will receive just as much public notice and industry vitriol.

After reading the comments, it’s clear that ethics is the underlying theme that unites them. Marsh breached a fundamental rule common to customer relations in any business–it acted dishonestly. Business relationships are like any other bond; they exist because the parties trust one another. Once that trust is breached it’s extremely difficult to win it back. Marsh faces that dilemma, but the entire industry does too as a result of what Marsh did, and the street is well aware of it.

Topics New York Agencies