One Year After Spitzer, Risk Managers Shifting to ‘Trust But Verify’ Mode

A year after the contingent commission scandal rocked the commercial insurance industry, new research has found significant shifts in the relationship between commercial insurance buyers and their brokers and how risk managers handle placement of their multi-million dollar insurance programs.

In a survey of more than 500 U.S. and Canadian corporations and governmental entities by Advisen Ltd., almost half the risk managers said they had made some significant change in the relationship with their incumbent broker, including replacing the broker or re-assigning some portion of their program to a new broker, or are considering a material change in their current broker relationship over the next 18 months.

A large percentage of risk managers said their relationship with brokers was changing in more subtle ways. For example, nearly 40 percent are now independently verifying the information provided to them from their broker and are taking a more active role throughout the placement process.

Additionally, about 60 percent felt that further standardization in the placement process would improve overall speed and efficiency of insurance transactions.

“The situation seems to be trust, but verify,” said David K. Bradford, editor-in-chief who co-authored the Advisen Briefing on the survey results. “Risk managers overall feel they have tackled the compensation issue, but clearly regard the placement process as a work in progress, and that will have an effect on their relationship with brokers and therefore the dynamics of the marketplace for some time.”

On the one hand, the survey shows that risk managers were satisfied with the industry reaction to revelations about compensation practices and chose to participate in the settlements between brokers and Spitzer. On virtually all compensation issues, risk managers overwhelmingly sided with their broker, saying their broker adequately discloses all compensation received in the placement of programs. About the same number said the level of transparency in the process was adequate or more than adequate.

Focus on placement process

On the other hand, disclosures about alleged bid-rigging and steering of programs to select insurance companies have led to a renewed activism focused on the placement process. Thirteen percent of risk managers have already switched brokers, with another 30 percent considering doing so soon.

Whether asking for proof that their insurance was bid for competitively or reviewing quotes with the insurance companies themselves, many buyers of commercial insurance are more directly involved than before the investigations, according to responses.

One common theme among risk managers was that while the end of contingent commissions has not altered the amount of compensation earned by their broker, respondents wondered why insurance companies have not reduced their premiums by the amount that was previously paid to brokers in contingent commissions.

This is the third survey conducted by Advisen. The first survey found that two-thirds of risk managers regarded contingent compensations as a conflict of interest for a broker. In the second, buyers expressed anger over the potential anti-competitive practices alleged.