Your article was fine but Spitzer is nuts!! He brings all these cases with hatred rather than to make things better and always with his political carreer in mind.
What about the agents? Agents are the ones who get paid on a percentage of the premium they generate. In my ten years as an agent I have seen nothing but less pay and lots of stories. Agents have been asked to understand that “profit sharing” and sweet heart deals are off limits to the commission agreements made between themselves and their brokerage houses. If twice as much money is on the table then the percentages of commision paid out is probably where the crime has been committed. Maybe thats why industry wages have been stagnant. No governemnt entity is stepping in to view this. Our president was loosely quoted as saying that insurance companies kept losing law suits on how they (don’t) pay there overtime and retirement benefits – So he changed the overtime rules so they would not be breaking the law. Any Allstate agents left to complain? (Independent Contractors)
The rest of spitzers accusations are sort of bologna to me. If you went into any store in the world and the merchant had three products for sale, could you sue him because one is not the best in the world? Of course not. Would you be foolish if you did not shop in any other shops for an important product? Of course!
As far as asking to get a quote from someone that is not interested in selling the product, that happens all the time. Example- No insurers want to sell auto coverage in New Jersey. The minimum medical liability allowed is a quarter of a million dollars for the companies in New Jersey. The medical liability required toi be covered California is none. California has hundreds of companies who will give a quote- New Jersey has less then ten.
The proof of inpropriety would be if they refused to accept the risk they quoted.
I don’t see how keeping most of a companies revenue in management and not distributing it out to the sales force that brought it in hurt the public. It appears to be a scheme to skirt paying there employee’s not hurt the public. Marsh offers three quotes to people on policy renewal. They are not required to. Mostlikely this is to stop their customers from shopping elswhere. If they gave just there best quote would less people be hurt? No. No “crime would be present” Do they have a responsibility to offer the cheapest coverage available if the company offering the product is terrible to deal with? No they do not. If as an agent I don’t like a company or they don’t pay me for the work needed to be done I would pass. Would you put something on your store shelf if there was no profit in it? No you would not.
The agents and workers, that’s who are taking it on the chin.
I agree and those that will suffer are the ones making $50k not $200k. In order to meet the pressures of increasing corporate profits I doubt any substantial change will take place, instead a modification of the existing system will ensue where carriers pay a flat fee for the brokers services. That $800m in profit has to be made up somewhere and my bet is that the client will bear the burden.
Of greatest issue here is the fact that Marsh was actually involved in a criminal bid rigging practice.
The payment of contingent commisions is not illegal and the public should be made aware of that. We need the insurance organizations to speak up and put the public on the right track rather than do nothing about this.
Whe my car dealer gets a bonus for the nubmer of vehicles sold, am I entitled to that? When a large stationary chain gets a bonus for selling more #2 pencils from a certain manufacturer, am I entitled to it?
Business have to make a profit and as long as it is done legally and the consumers are not hurt what is the difference of how it is obtained?
An “agent” works for the insurer and has a fiduciary duty to the insurer. Agents can have any type of comp you want, because effectively they behave like employees of the insurer.
A “broker” on the other hand, does NOT work for the insurer -they are hired by, and therefore have a fiduciary duty to, the policyholder. That’s why M&M is in trouble – they violated their fiducary duty as brokers by colluding with the insurer to steer business. The policyholder has a right to expect the broker will put their (the policyholder’s) interests FIRST, which is not what M&M did. And they engaged in fraud by presenting fake bids.
The contingent comissions AIG and M&M used work for agents, but it’s hard to argue they’re a good idea for brokers, because they create a conflict of interest.
You’re using semantics to make this fit your idea of what is right and wrong. Of course agents can make contingencies work against the benefit of the client. If Mr. Agent has company A who pays him handsomely on the back-end and company B who doesn’t, then this can have an impact on his decision about which insurer to place a client with. Period.
Having said this, I still don’t think that contingency arrangements should be automatically cast off as “illegal” or “unethical” (as they are currently being portrayed), real transparancy (not the B.S. Marsh tried to pull off) should allow this practice to continue as long as the clients have the whole picture.
Any time there is a commission paid based upon amounts of product sold, and “extra” commissions if the “right” product is sold, then, regardless of the industry, there is the chance for unethical behavior. One only has to recall the “bait and switch” allegations in the major home appliance sales industry in the 70’s to see that.
As I understand the crime as alleged, Marsh supposedly used threats to carriers of lost access to Marsh clients in order to one, wring increased contingent commissions out of said carriers, and two, ensure that they could meet the production levels set in the commission agreements to Marsh’s maximum advantage.
What I don’t see in the allegations is any intent on Marsh’s part to make the “system” inure to the benefit of their clients (except possibly those who they forced some otherwise unwilling carrier to underwrite because no one else would), or the carriers (although, by default, some may have benefitted by getting some profitable business they otherwise would not).
So, while the argument against accepting client fees and carrier commissions raises the specter of serving two masters, which in CPCU 1 we all learned we can’t do, it seems to me that the allegation here is that Marsh was serving only itself, treating all others with disdain.
As I see it, there are two immediate challenges to brokers. The first is to prove that they are serving their true master, whether fees are paid by the client or the carrier. The second is to prove that, in best representing their client, the purchaser, they also provide a value added service to the carriers they place business with, which, rightfully, the carrier should pay for.
This could actually cause the brokers-Marsh, AON, Willis,Gallagher, HUB, B&B-you pick ’em, a lot of trouble. They have been growing under the idea that they could use their size to extract a better deal from the carriers than the local agents and regional pseudo-brokers and thus deliver enhanced shareholder value-remember that 20 years ago, most brokers were either privately held or closely held companies-none were on anybody’s radar screen. If this gets stopped-either by people like Spitzer or voluntarily to avoid uprisings by shareholders, then there is no advantage to the size of any of these brokerage houses any longer. That in turn would change the dynamics of many of the super sized carriers-Travelers, Hartford, CNA, etc. and how they in turn treat business acqusition. This could end up being the story of the year
Mr. Spitzer,
I commend you. Keep up the good work. Marsh has been flexing their muscles for years and intimidating the entire insurance world. However, like any big corporation, there are many many good people. Look at the top, I guarantee you that will be where the problem lies.
I agree. Contingency agreements are not illegal for insurance carriers and agents/brokers, just as they are not illegal in any other industry. If I want to purchase a digital camera, do I care what SONY is paying the dealer to get him to push SONY’s cameras on me? Not if I’m an educated buyer. Are risk managers not educated buyers — especially those who represent Marsh’s Fortune 500 and large public entity clients? Come on.
Unfortunately, Spitzer’s witch hunt has also turned up criminal activity on the part of company and brokerage employees. And that is lending credence to Spitzer’s entire investigation at a very opportune (election) time.
The media, likewise, has done the insurance industry — and the general public — a disservice by not making any distinction between criminal price-fixing and collusion, and legitimate contingency or profit sharing contracts used as a standard compensation tool for agents and brokers.
Don’t demonize the entire brokerage community because of the activities at Marsh. This is their third strike in a year’s time — yet the media wants to proclaim this as industry-wide corruption, rather than Marsh’s corporate culture gone bad.
I agree with Lori, yes – price fixing or inflating quotes is a no-no. But the reality is that other industries have bonus agreements or incent their sales reps to market their product. What do stock brokers do with mutual funds or drug companies do with doctors? Yes, ethics should be #1 but there is a destinction between profit sharing based on volume and favorable loss ratios achieved with agents who to a good job for a carrier. The impact of this individuals actions (Spitzers) on a few will cost many innocent people their jobs and huge losses to company 401K’s/retiremant plans.
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.
What about the risk manager’s relationship with his “broker”? Could he be implicated too? After all there are clearly very large overt entertaining perks from brokers and insurers to risk managers. Is there a limit to which this can go before it is seen as bribery?
Many brokers have moved toward fee based arrangements and away from commissions as the method of compensation on their larger clients. Seldom are the contingency fees mentioned in the broker client agreement thereby blindly increasing the brokers revenue with no reduction in cost to the client in spite of the existance of a fee based agreement. In addition the additional compensation is not paid to commission based producers just shared with the executives on the top which allows them to take advantage of their own employees as well. Go get em Spitzer.
The arguments for tort reform consistently cite to the high cost of liability insurance as evidence that our legal system is out of control. These arguments falsely assume, however, that insurance pricing and the “cost of risk” are somehow determined by the efficient market forces upon which our economy theoretically operates – at least this is what those who stand to profit by limiting an injured citizen’s right to recover would have us believe. Mr Spitzer’s peek behind the curtain now reveals that at least a few, and likely more, hands have been on the lever. With all of this, the first question that comes to mind is “What does the campaigning Bush Administration have to say about these latest revelations?” It is interesting to note the close relationship between AIG’s Hank Greenberg and the Bush Presidents(both George I and GeorgeII). I am surprised that the Democrats have not jumped on this.
I believe Lori has very appropriately explained the situation for most insurance agents.
First, I can’t believe these big houses can’t control themselves and they just get to greedy! The typcial problem is a few destroy the image for many. Look at what happened in Chicago to Near North.
However, here are some down and close questions for Spitzer to answer? The thing that really frustrates me about it is every sales position and product sold in America has incentives tied to it. It is part of doing business. Do you think Wal-Mart passes all of their bulk buying discounts on to their clients or do you think they keep the spread and charge what is acceptable in the market? If they don’t, why can you buy the same things for cheaper at Sam’s Club? Do you think the larger contractors who get bigger discounts at the lumber yard pass on their discounts or do they just make more? Even attorney’s have incentive to get larger rewards because they make more. Do they tell the client that is why they are asking for so much? Better yet, every attorney fee that gets paid eventually comes back out of the consumers pocket in some way! Do you think Mr. Spitzer could have done the same work for less money on his recent settlements? His financial impact is probably bigger than every case of bid fixing out there. (Ask a physician about his Medical Malpractice Policy rate if you don’t think an attorney has any impact!) The other frustrating thing is what other industries have to disclose how much they are making when a sale is made? Automobile? Gas Stations? Banks? All Retail Stores? Based on his postion, Spitzer could sue every business in America. Hopefully, those companies that are guilty of bid fixing will pay the penalties and the rest of the industry will go on! Ethics are a huge factor in every business decision and they should not be overlooked for insurance agents or any industry. Competition is very strong in the insurance industry and these types of practices will not and can not survive, nor do they survive in most industries.
The question is
Does an agreement to compensate a Broker/Agent based on losses provide temptation for Carriers & Brokers to collude against the insured on claims?
There can be a tendency for brokers to try and talk clients into not submitting claims that are worth little beyond the deductible/retention, or get them to hold off on submission until a policy has been written or renewed. But, my experience (although all of it is on the claims side) has been that the collusion is between the broker and the client, not the broker and the carrier.
Once a valid claim is submitted, its pretty dangerous for the broker to try and conspire with the carrier to not pay a claim. More often, the broker conspires with the client to get the claim paid once the carrier denies or reserves rights.
If Marsh placed every policy sold in the US, and every policy Marsh sold included an aspect of the illegal activities alleged (essentially bid rigging), and that illegal activity was the sole cause of inflated prices of all policies, then I would agree with MGD.
However, the probability is that not all of Marsh’s book involved illegal acts, and the reality is that, while Marsh may be the biggest US commercial broker, their share of the total insurance market (all lines, sold by all types of selling models) in the US just doesn’t justify the quantum leap that MGD makes in his assertion.
And, to the extent that illegal practices have increased premium, I don’t thik anyone would argue that reductions are in order.
But, almost every product sold has a cost of selling associated with it. And, to be certain, the cost of sales affects pricing. But a CPCU should know that, all other things being equal, lines of coverage that have higher litigation frequency/costs are priced higher. And, lines of coverage that have unnecessarily higher litigation frequency/costs are are priced unnecessarilty higher, or are unaffordable to the majority of risks that need the coverage, or are unavailable altogether.
Tort reforms, when aimed at the unnecessary frequency/cost component of the equation, are certainly justified if it means eliminating the unnecessary higher price attendant, making the policies affordable, or making them available when they otherwise would not be.
Two observation: (1) We don’t know the extent to which the market has not been able to operate efficiently because the numbers will continue to change as the probe go deeper and others, in addition to Marsh , are implicated. To the extent that business is placed with carriers offering a higher contingency package because of that package as oppossed to best pricing available, there is a problem. We do know that most standard carriers operating in the American Agency system have such arrangements with their producers and therefore have created an incentive that the best deal not neccesarily be offered. Therefore, how much of the total cost is actually made up of the delivery cost component? This question must be answered before the matter of bid rigging is even discussed.
(2) To what extent are unnecessarily high litigation frequency/costs being incurred? In medical malpractice for instance, the most expensive component of cost for both the plaintiff and defendant in any case, whether meritorious or not, comes from the use of expert witnesses. The expert hourly fees are most often 2.5 to 5 times higher than what the attorney who is being paid to defend the case is charging. These experts come from the same medical community which cries foul because litigation is too expensive. Further, a significant amount of malpractice coverage is written through doctor owned mutuals who pay these high expert fees to their members to testify and then include the cost as a justification to raise premiums. The complaints about increasing premiums or unavailable coverage then come from these same Doctors. The important point to consider is that the pricing and/or availablity of insurance as currently represented should not be the measuring stick to justify tort reform initiatives which would unfairly deny an injured person the right to hold a responsible party fully accountable.
I totally agree with Greg. In my many years on the company side we routinely gave agents and brokers contingent commissions. Most of these deals were based on a profitable result. Sometimes extra commission would be given on a very large account written as new business to cover the agent’s or broker’s additional marketing and transfer costs (set up with a new company). There were volume commitment agreements as well. However, underwriting decision making and pricing were never compromised.
It sounds, unfortunately, as if some brokers may not have acted in the best interest of their clients and some underwriters were bullied by brokers – but Mr. Spitzer, please don’t spend government money by buying an elephant gun when you could use a fly swatter!!! Your career should not be more important than what’s fair…the expense of prosecuting this case will be enormous and will ruin many insured, insurance company and broker relationships…this will hurt the public as well. The industry has a great deal of integrity as evidenced by all of the good and honest people who work in it. Let’s not throw many of the best practices that help both the broker and the public out the window.
I believe that no one in business has a problem with commission based sales, however, it seems that what Marsh (and the carrier’s involved in this) may have done
crosses the line by rigging the bids (if the allegations ultimately prove to be true).
We’ll shall see but I do believe that a complete investigation (full disclosure by all parties) of the allegations is in order…
If the allegations prove founded our industry will take a hit (financially and reputation wise) but if the allegations prove unfounded it would my hope that our industry would be cleared of the allegations…
FOr those of you who haven’t read the filing on this case may want to take the time to do so. After I read that I came away with the unshakeable conclusion that what was happening was outright extortion by Marsh. However, the carriers have to shoulder some of the blame in allowing themselves to be caught up in Marsh’s games. We stil live in a society of “no-fault” mentalities, which is the stance it appears many carriers and brokers have taken. I agree that “commission” based sales in the real world have been in use forever and when used as originally designed serve as a profit maker and business builder. I agree with all those who have stated we should just go after the bad guys. There are many good guys out there who Spitzer will damage as well with broad brush remarks. The best resource we have to clean up this mess is within our own ranks.
To the extent that Spitzer’s complaint goes beyond the limitations of reasonably correcting wrongdoing, it is notable that the motive for political success, like the motive for profit, will also bring the temptation to abuse monopolistic power and the public trust.
Your article was fine but Spitzer is nuts!! He brings all these cases with hatred rather than to make things better and always with his political carreer in mind.
What about the agents? Agents are the ones who get paid on a percentage of the premium they generate. In my ten years as an agent I have seen nothing but less pay and lots of stories. Agents have been asked to understand that “profit sharing” and sweet heart deals are off limits to the commission agreements made between themselves and their brokerage houses. If twice as much money is on the table then the percentages of commision paid out is probably where the crime has been committed. Maybe thats why industry wages have been stagnant. No governemnt entity is stepping in to view this. Our president was loosely quoted as saying that insurance companies kept losing law suits on how they (don’t) pay there overtime and retirement benefits – So he changed the overtime rules so they would not be breaking the law. Any Allstate agents left to complain? (Independent Contractors)
The rest of spitzers accusations are sort of bologna to me. If you went into any store in the world and the merchant had three products for sale, could you sue him because one is not the best in the world? Of course not. Would you be foolish if you did not shop in any other shops for an important product? Of course!
As far as asking to get a quote from someone that is not interested in selling the product, that happens all the time. Example- No insurers want to sell auto coverage in New Jersey. The minimum medical liability allowed is a quarter of a million dollars for the companies in New Jersey. The medical liability required toi be covered California is none. California has hundreds of companies who will give a quote- New Jersey has less then ten.
The proof of inpropriety would be if they refused to accept the risk they quoted.
I don’t see how keeping most of a companies revenue in management and not distributing it out to the sales force that brought it in hurt the public. It appears to be a scheme to skirt paying there employee’s not hurt the public. Marsh offers three quotes to people on policy renewal. They are not required to. Mostlikely this is to stop their customers from shopping elswhere. If they gave just there best quote would less people be hurt? No. No “crime would be present” Do they have a responsibility to offer the cheapest coverage available if the company offering the product is terrible to deal with? No they do not. If as an agent I don’t like a company or they don’t pay me for the work needed to be done I would pass. Would you put something on your store shelf if there was no profit in it? No you would not.
The agents and workers, that’s who are taking it on the chin.
Greg Lloyds
greg@glpi.biz
Timing is everything isn’t it???? I wonder which side of the “political fence” Mr. Spitzer leans…………
I agree and those that will suffer are the ones making $50k not $200k. In order to meet the pressures of increasing corporate profits I doubt any substantial change will take place, instead a modification of the existing system will ensue where carriers pay a flat fee for the brokers services. That $800m in profit has to be made up somewhere and my bet is that the client will bear the burden.
its about time.
Of greatest issue here is the fact that Marsh was actually involved in a criminal bid rigging practice.
The payment of contingent commisions is not illegal and the public should be made aware of that. We need the insurance organizations to speak up and put the public on the right track rather than do nothing about this.
Whe my car dealer gets a bonus for the nubmer of vehicles sold, am I entitled to that? When a large stationary chain gets a bonus for selling more #2 pencils from a certain manufacturer, am I entitled to it?
Business have to make a profit and as long as it is done legally and the consumers are not hurt what is the difference of how it is obtained?
Be careful of your definitions –
An “agent” works for the insurer and has a fiduciary duty to the insurer. Agents can have any type of comp you want, because effectively they behave like employees of the insurer.
A “broker” on the other hand, does NOT work for the insurer -they are hired by, and therefore have a fiduciary duty to, the policyholder. That’s why M&M is in trouble – they violated their fiducary duty as brokers by colluding with the insurer to steer business. The policyholder has a right to expect the broker will put their (the policyholder’s) interests FIRST, which is not what M&M did. And they engaged in fraud by presenting fake bids.
The contingent comissions AIG and M&M used work for agents, but it’s hard to argue they’re a good idea for brokers, because they create a conflict of interest.
You’re using semantics to make this fit your idea of what is right and wrong. Of course agents can make contingencies work against the benefit of the client. If Mr. Agent has company A who pays him handsomely on the back-end and company B who doesn’t, then this can have an impact on his decision about which insurer to place a client with. Period.
Having said this, I still don’t think that contingency arrangements should be automatically cast off as “illegal” or “unethical” (as they are currently being portrayed), real transparancy (not the B.S. Marsh tried to pull off) should allow this practice to continue as long as the clients have the whole picture.
Steve hits the nail on the head.
Any time there is a commission paid based upon amounts of product sold, and “extra” commissions if the “right” product is sold, then, regardless of the industry, there is the chance for unethical behavior. One only has to recall the “bait and switch” allegations in the major home appliance sales industry in the 70’s to see that.
As I understand the crime as alleged, Marsh supposedly used threats to carriers of lost access to Marsh clients in order to one, wring increased contingent commissions out of said carriers, and two, ensure that they could meet the production levels set in the commission agreements to Marsh’s maximum advantage.
What I don’t see in the allegations is any intent on Marsh’s part to make the “system” inure to the benefit of their clients (except possibly those who they forced some otherwise unwilling carrier to underwrite because no one else would), or the carriers (although, by default, some may have benefitted by getting some profitable business they otherwise would not).
So, while the argument against accepting client fees and carrier commissions raises the specter of serving two masters, which in CPCU 1 we all learned we can’t do, it seems to me that the allegation here is that Marsh was serving only itself, treating all others with disdain.
As I see it, there are two immediate challenges to brokers. The first is to prove that they are serving their true master, whether fees are paid by the client or the carrier. The second is to prove that, in best representing their client, the purchaser, they also provide a value added service to the carriers they place business with, which, rightfully, the carrier should pay for.
This could actually cause the brokers-Marsh, AON, Willis,Gallagher, HUB, B&B-you pick ’em, a lot of trouble. They have been growing under the idea that they could use their size to extract a better deal from the carriers than the local agents and regional pseudo-brokers and thus deliver enhanced shareholder value-remember that 20 years ago, most brokers were either privately held or closely held companies-none were on anybody’s radar screen. If this gets stopped-either by people like Spitzer or voluntarily to avoid uprisings by shareholders, then there is no advantage to the size of any of these brokerage houses any longer. That in turn would change the dynamics of many of the super sized carriers-Travelers, Hartford, CNA, etc. and how they in turn treat business acqusition. This could end up being the story of the year
Mr. Spitzer,
I commend you. Keep up the good work. Marsh has been flexing their muscles for years and intimidating the entire insurance world. However, like any big corporation, there are many many good people. Look at the top, I guarantee you that will be where the problem lies.
I agree. Contingency agreements are not illegal for insurance carriers and agents/brokers, just as they are not illegal in any other industry. If I want to purchase a digital camera, do I care what SONY is paying the dealer to get him to push SONY’s cameras on me? Not if I’m an educated buyer. Are risk managers not educated buyers — especially those who represent Marsh’s Fortune 500 and large public entity clients? Come on.
Unfortunately, Spitzer’s witch hunt has also turned up criminal activity on the part of company and brokerage employees. And that is lending credence to Spitzer’s entire investigation at a very opportune (election) time.
The media, likewise, has done the insurance industry — and the general public — a disservice by not making any distinction between criminal price-fixing and collusion, and legitimate contingency or profit sharing contracts used as a standard compensation tool for agents and brokers.
Don’t demonize the entire brokerage community because of the activities at Marsh. This is their third strike in a year’s time — yet the media wants to proclaim this as industry-wide corruption, rather than Marsh’s corporate culture gone bad.
I agree with Lori, yes – price fixing or inflating quotes is a no-no. But the reality is that other industries have bonus agreements or incent their sales reps to market their product. What do stock brokers do with mutual funds or drug companies do with doctors? Yes, ethics should be #1 but there is a destinction between profit sharing based on volume and favorable loss ratios achieved with agents who to a good job for a carrier. The impact of this individuals actions (Spitzers) on a few will cost many innocent people their jobs and huge losses to company 401K’s/retiremant plans.
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.
What about the risk manager’s relationship with his “broker”? Could he be implicated too? After all there are clearly very large overt entertaining perks from brokers and insurers to risk managers. Is there a limit to which this can go before it is seen as bribery?
Many brokers have moved toward fee based arrangements and away from commissions as the method of compensation on their larger clients. Seldom are the contingency fees mentioned in the broker client agreement thereby blindly increasing the brokers revenue with no reduction in cost to the client in spite of the existance of a fee based agreement. In addition the additional compensation is not paid to commission based producers just shared with the executives on the top which allows them to take advantage of their own employees as well. Go get em Spitzer.
The arguments for tort reform consistently cite to the high cost of liability insurance as evidence that our legal system is out of control. These arguments falsely assume, however, that insurance pricing and the “cost of risk” are somehow determined by the efficient market forces upon which our economy theoretically operates – at least this is what those who stand to profit by limiting an injured citizen’s right to recover would have us believe. Mr Spitzer’s peek behind the curtain now reveals that at least a few, and likely more, hands have been on the lever. With all of this, the first question that comes to mind is “What does the campaigning Bush Administration have to say about these latest revelations?” It is interesting to note the close relationship between AIG’s Hank Greenberg and the Bush Presidents(both George I and GeorgeII). I am surprised that the Democrats have not jumped on this.
MGD, JD, CPCU
I believe Lori has very appropriately explained the situation for most insurance agents.
First, I can’t believe these big houses can’t control themselves and they just get to greedy! The typcial problem is a few destroy the image for many. Look at what happened in Chicago to Near North.
However, here are some down and close questions for Spitzer to answer? The thing that really frustrates me about it is every sales position and product sold in America has incentives tied to it. It is part of doing business. Do you think Wal-Mart passes all of their bulk buying discounts on to their clients or do you think they keep the spread and charge what is acceptable in the market? If they don’t, why can you buy the same things for cheaper at Sam’s Club? Do you think the larger contractors who get bigger discounts at the lumber yard pass on their discounts or do they just make more? Even attorney’s have incentive to get larger rewards because they make more. Do they tell the client that is why they are asking for so much? Better yet, every attorney fee that gets paid eventually comes back out of the consumers pocket in some way! Do you think Mr. Spitzer could have done the same work for less money on his recent settlements? His financial impact is probably bigger than every case of bid fixing out there. (Ask a physician about his Medical Malpractice Policy rate if you don’t think an attorney has any impact!) The other frustrating thing is what other industries have to disclose how much they are making when a sale is made? Automobile? Gas Stations? Banks? All Retail Stores? Based on his postion, Spitzer could sue every business in America. Hopefully, those companies that are guilty of bid fixing will pay the penalties and the rest of the industry will go on! Ethics are a huge factor in every business decision and they should not be overlooked for insurance agents or any industry. Competition is very strong in the insurance industry and these types of practices will not and can not survive, nor do they survive in most industries.
The question is
Does an agreement to compensate a Broker/Agent based on losses provide temptation for Carriers & Brokers to collude against the insured on claims?
There can be a tendency for brokers to try and talk clients into not submitting claims that are worth little beyond the deductible/retention, or get them to hold off on submission until a policy has been written or renewed. But, my experience (although all of it is on the claims side) has been that the collusion is between the broker and the client, not the broker and the carrier.
Once a valid claim is submitted, its pretty dangerous for the broker to try and conspire with the carrier to not pay a claim. More often, the broker conspires with the client to get the claim paid once the carrier denies or reserves rights.
If Marsh placed every policy sold in the US, and every policy Marsh sold included an aspect of the illegal activities alleged (essentially bid rigging), and that illegal activity was the sole cause of inflated prices of all policies, then I would agree with MGD.
However, the probability is that not all of Marsh’s book involved illegal acts, and the reality is that, while Marsh may be the biggest US commercial broker, their share of the total insurance market (all lines, sold by all types of selling models) in the US just doesn’t justify the quantum leap that MGD makes in his assertion.
And, to the extent that illegal practices have increased premium, I don’t thik anyone would argue that reductions are in order.
But, almost every product sold has a cost of selling associated with it. And, to be certain, the cost of sales affects pricing. But a CPCU should know that, all other things being equal, lines of coverage that have higher litigation frequency/costs are priced higher. And, lines of coverage that have unnecessarily higher litigation frequency/costs are are priced unnecessarilty higher, or are unaffordable to the majority of risks that need the coverage, or are unavailable altogether.
Tort reforms, when aimed at the unnecessary frequency/cost component of the equation, are certainly justified if it means eliminating the unnecessary higher price attendant, making the policies affordable, or making them available when they otherwise would not be.
Two observation: (1) We don’t know the extent to which the market has not been able to operate efficiently because the numbers will continue to change as the probe go deeper and others, in addition to Marsh , are implicated. To the extent that business is placed with carriers offering a higher contingency package because of that package as oppossed to best pricing available, there is a problem. We do know that most standard carriers operating in the American Agency system have such arrangements with their producers and therefore have created an incentive that the best deal not neccesarily be offered. Therefore, how much of the total cost is actually made up of the delivery cost component? This question must be answered before the matter of bid rigging is even discussed.
(2) To what extent are unnecessarily high litigation frequency/costs being incurred? In medical malpractice for instance, the most expensive component of cost for both the plaintiff and defendant in any case, whether meritorious or not, comes from the use of expert witnesses. The expert hourly fees are most often 2.5 to 5 times higher than what the attorney who is being paid to defend the case is charging. These experts come from the same medical community which cries foul because litigation is too expensive. Further, a significant amount of malpractice coverage is written through doctor owned mutuals who pay these high expert fees to their members to testify and then include the cost as a justification to raise premiums. The complaints about increasing premiums or unavailable coverage then come from these same Doctors. The important point to consider is that the pricing and/or availablity of insurance as currently represented should not be the measuring stick to justify tort reform initiatives which would unfairly deny an injured person the right to hold a responsible party fully accountable.
I totally agree with Greg. In my many years on the company side we routinely gave agents and brokers contingent commissions. Most of these deals were based on a profitable result. Sometimes extra commission would be given on a very large account written as new business to cover the agent’s or broker’s additional marketing and transfer costs (set up with a new company). There were volume commitment agreements as well. However, underwriting decision making and pricing were never compromised.
It sounds, unfortunately, as if some brokers may not have acted in the best interest of their clients and some underwriters were bullied by brokers – but Mr. Spitzer, please don’t spend government money by buying an elephant gun when you could use a fly swatter!!! Your career should not be more important than what’s fair…the expense of prosecuting this case will be enormous and will ruin many insured, insurance company and broker relationships…this will hurt the public as well. The industry has a great deal of integrity as evidenced by all of the good and honest people who work in it. Let’s not throw many of the best practices that help both the broker and the public out the window.
Good Afternoon!!
I believe that no one in business has a problem with commission based sales, however, it seems that what Marsh (and the carrier’s involved in this) may have done
crosses the line by rigging the bids (if the allegations ultimately prove to be true).
We’ll shall see but I do believe that a complete investigation (full disclosure by all parties) of the allegations is in order…
If the allegations prove founded our industry will take a hit (financially and reputation wise) but if the allegations prove unfounded it would my hope that our industry would be cleared of the allegations…
Mike
FOr those of you who haven’t read the filing on this case may want to take the time to do so. After I read that I came away with the unshakeable conclusion that what was happening was outright extortion by Marsh. However, the carriers have to shoulder some of the blame in allowing themselves to be caught up in Marsh’s games. We stil live in a society of “no-fault” mentalities, which is the stance it appears many carriers and brokers have taken. I agree that “commission” based sales in the real world have been in use forever and when used as originally designed serve as a profit maker and business builder. I agree with all those who have stated we should just go after the bad guys. There are many good guys out there who Spitzer will damage as well with broad brush remarks. The best resource we have to clean up this mess is within our own ranks.
To the extent that Spitzer’s complaint goes beyond the limitations of reasonably correcting wrongdoing, it is notable that the motive for political success, like the motive for profit, will also bring the temptation to abuse monopolistic power and the public trust.
Agree with your point but in a corporate envrionment is there any aminasity given to lower and middle level employees ?