While the contingent commissions controversy has been roiling the upper decks of the insurance industry, mid-size brokers and carriers could benefit from increased disclosure, heightened professionalism among its ranks, easier recruiting, and, in the longer term, a greater sense of trust among its customers.
“I’m encouraged for the mid-tier brokerages,” said Randall Buhlig, managing director for financial risk management and insurance at the accounting firm KPMG. “This situation may have some very good unexpected results.”
The first effect to hit those firms lower on the industry’s economic food chain, like their larger counterparts, has been reputational damage.
“Everyone in the industry is being tarnished,” said Eric Robinson, an independent agent in Lido Beach, N.Y. “The level of trust is substantially depleted.”
But the news for the mid-tier is not all bad. Industry observers tick off a long list of possible advantages that may accrue to smaller companies in the wake of the insurance investigations. The most immediate effect, Buhlig said, is that “the customer ranks are going to force the mid-tier to provide answers on contingencies. The marketplace is going to demand that very quickly.”
The growing amount of disclosure and communication caused by this pressure could result in increased professionalism, said Andrew J. Barile, an insurance consultant based in Rancho Santa Fe, Calif.
“The midsize risk manager is going to ask a lot more questions. The midsize broker is going to have to be trained to answer them.”
If this disclosure and communication raises the performance bar for midsize carriers and brokers, the level of trust between these companies and their clients could well be higher than it was before the commission controversy emerged in October, Robinson said. And that, he added, would be good for everyone.
“It’s always hard to clean house,” he acknowledged, “but it’s necessary. And then everybody starts all over again fresh.”
Another potential advantage for the mid-tier firms is the sudden arrival on the job market of thousands of experienced insurance professionals from the large insurers and brokers where problems have emerged. Marsh & McLennan Cos. Inc., for instance, has announced that it would lay off 3,000 employees as a result of its decision to give up contingent commissions.
An influx of well-trained agents and brokers from the big firms could further increase the professionalism of the mid-tier companies and sharpen the competitive edge. But whether these agents and brokers will be able to bring business with them is another question.
Robert Hartwig, chief economist at the Insurance Information Institute, predicts there won’t be an enormous amount of customer shifting from the large firms to the mid-tier as a result of the current controversy. This is true mostly because the capacity of the smaller companies isn’t likely to expand enough to be able to handle big corporate clients.
“A midsize broker in Milwaukee is not suddenly going to get [a Fortune 100] account,” he pointed out.
Another potential outcome may be the likelihood of new disclosure requirements, perhaps from the National Association of Insurance Commissioners or from Congress. The cost of these new compliance rules will run into the hundreds of millions of dollars, predicts Hartwig, and will hit all companies in the insurance industry, regardless of size. The burden of these increased expenses may lead to an acceleration of mergers between mid-tier firms seeking to spread the payments over a wider base.
“Whenever you have added costs, it increases mergers and acquisitions,” Buhlig said. “The mid-tier will have to add staff in order to make these new disclosure statements.”
In the short term, however, companies may be dissuaded from pursuing merger deals because of the heightened scrutiny such transactions bring. To raise the money needed to cover any new disclosure rules, mid-tier carriers, for instance, are more likely to raise premiums than make acquisitions. But the price of stepped up compliance will have to be equitably distributed between insurers, brokers and their customers.
“It would be ironic if the buyer of insurance ultimately had to bear that cost alone,” Hartwig said.
Right now, most mid-tier brokers and insurers are trying to convince their customers that small is beautiful, and that the alleged bid-rigging was pursued by a few overzealous executives at the largest companies in the business.
“The thing about the insurance industry,” Buhlig said, “is that it’s like a cat with 20 lives. Drop it from a building, and it always lands on its feet.”
Article reprinted from KPMG’s Insurance Insider with permission of KPMG LLP. Copyright 2004 KPMG LLP, the U.S. member
firm of KPMG International, a Swiss cooperative. All rights reserved. Disclaimer from KPMG: All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity.
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