The simmering compensation conflict between London’s broker community and the underwriters they work with erupted following a keynote speech given by the Catlin Group’s chief executive Stephen Catlin at a recent conference in London sponsored by Insurance Day.
Catlin made it very clear that he is against any form of “contingent commissions,” telling the conference that they “eventually always end in tears.” Catlin, who’s been in the insurance business for 40 years, chided brokers on their lack of transparency, indicating that, for all his experience, he’s “never worked out how insurance brokers can carry on conducting business and describing it in the way they do.”
Catlin’s “cri de Coeur,” as the French would describe it, echoes an upsurge of resentment from both insurers and insurance buyers over brokers, primarily in London, but also in the U.S. and elsewhere, charging fees for services, which many insurers, and ultimately their clients, feel are another form of contingent commission.
Smoke became fire last April, when Tom Bolt, director of performance management at Lloyd’s, wrote a letter, advising brokers and MGAs that “additional insurer charges” could be prohibited or even illegal under applicable UK regulations.
Bolt cited the “outsourcing” nature of the relationship between a broker and an insurer when the broker charges insurers for “services” that aren’t delineated. The Financial Services Authority (FSA) requires a prior written agreement between the parties for most types of service agreements.
He also warned that by performing services for the insurer, brokers could be construed as having become their agents, rather than a neutral intermediary. In addition he pointed to newly enhanced bribery laws in the UK, indicating that they too might apply.
The brokerage community has rejected these charges, indicating that they do perform a number of necessary functions incident to the placement of insurance, and should be paid for their work. The fees are standardized as a percentage, as they reflect the degree of difficulty in placing the coverage and make it easier and less costly to calculate.
At the recent international Risk and Insurance Management Society (RIMS) meeting in Vancouver, brokers were challenged to defend their compensation, including their moves to negotiate so-called enhanced commissions on certain accounts.
The brokers said that all forms of commissions are acceptable as long as there is transparency. They insisted they are being transparent with their clients. They also said they are happy to work with those that prefer to work on a fee basis.
The brokers described their enhanced commissions as payments that are determined upfront, unlike contingencies that are based on history and that have come in for criticism.
“I sometimes think we get a little bit hung up on the whole subject of contingencies,” said Stephen McGill, CEO of Aon Risk Services. He said figures for 2009 showed that for the entire U.S. property/casualty industry, there was $52 billion of direct commissions with contingents only $3 billion of that.
“Aon has never earned significant amounts of contingents and I don’t believe ever will,” McGill said. “That doesn’t mean that in our view those aren’t acceptable… What is important is transparency and disclosure and managing of conflicts.”
J. Patrick Gallagher, CEO of Arthur J. Gallagher, said 87 percent of AJG’s revenue on the broker side comes through commissions paid by clients who know what the commissions are.
“I think transparency and disclosure eliminate conflicts of interests,” Gallagher said at RIMS. “If you’re truly honest with your clients and willing to work for a reasonable price, transparency is the issue.”
Reinforcing the transparency argument, Alan W. Garner, CEO of Marsh Canada, said that the taking of any enhanced commissions has to be authorized by clients. “It’s very, very transparent,” he said.
Brokers would prefer to shift the discussion away from what and how they are being paid and more in the direction of what they are providing for services.
Marsh’s Garner said brokers need additional revenue so they can compete for top talent. He said large brokers face serious competition from regional and other major brokers to attract and retain quality employees. “Those compensation levels do not operate at a cost of living variable every year. They are incredibly dynamic and they are market set,” he said.
In his remarks, Catlin offered a possible way out of the impasse. The brokers should “learn to sell a fee to clients,” similar to their dealings with underwriters. If that were to become a recognized business practice, it would not only introduce a great deal of needed transparency as to how brokers are paid, but also what they are paid for.
Catlin added that the underwriters [in the Lloyd’s market they represent the MGAs who manage Lloyd’s syndicates, otherwise they are directly employed by the insurers] with whom the brokers deal directly, shouldn’t be expected to pay for everything a broker does.
Although he acknowledged that brokers do deserve to be paid for what they do “in the distribution of business,” he added that they should also “learn to be competitive and transparent about the processes” they do, so we (the insurers) can see what they do “and what it’s costing.”
Were that to happen, it would make it easier for underwriters, and by definition the MGAs or companies they represent, to determine the most efficient way to handle any given process – no one should have a monopoly on it, according to Catlin. “Process should be done where it is most efficient to do it. If the broker does it best, great, he should do it. If the underwriter can do it best, he should do it. And if a third-party administrator does it best, he should do it,” he said.
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