From Brokers and Risk Managers, Mixed Signals on Compensation and Conflicts of Interest

By | April 20, 2005

The risk management community and the world’s largest insurance brokers sent mixed signals on the future of contingent commissions for insurance brokers and other potential areas of conflict of interest at this week’s Risk and Insurance Management Society annual conference.

RIMS President Ellen Vinck said that brokers should be paid by their clients only, and not by insurers. “The model should be that brokers are paid by one source and that is the client,” she said.

She also argued that the insurance industry should adopt an industry-wide ban on contingent fees or run the risk of government stepping in to do it for the industry.

“We agree that there is not one service model but that there should be one model for compensation,” Vinck told the RIMS gathering.

However, the organization stopped short of issuing a policy statement calling for an end to contingent commissions. The leaders said it was the responsibility of individual risk managers to convince their brokers to discontinue contingencies and disclose all income.

“Each risk manager must define what he needs,” said Vinck. Vinck, who is vice president of risk management and safety for United States Marine Repair Inc., challenged her fellow risk managers and brokers to work together to build a new compensation model, arguing that RIMS can’t do it for them.

“Risk managers, don’t sit back. Don’t be quiet anymore,” Vinck said.

RIMS leaders said risk managers are to blame along with brokers and insurers for the current turmoil over compensation and disclosure because risk managers have not asked brokers for an accounting of their services and compensation. “I think that’s a shame,” she said.

“For many years there has been aura of secrecy in regards to the practices if insurance brokers and insurance companies,” the RIMS leader said. “This secrecy continues to be the primary cause of the erosion of faith that risk managers have in their brokers.”

At the same forum, the chief executives of the two largest insurance brokers, Marsh and Aon, whose firms have both eliminated contingencies, disagreed over whether all agents and brokers should follow their example and do away with contingencies throughout the industry, as the CEO of the third largest broker, Willis Group, had urged in his earlier remarks. Some brokers continue to support contingent fees.

Michael Cherkasky, CEO and president of Marsh, said the marketplace “needs to say no” to contingent commissions because they are “inherently” a problem. While he agreed that the industry should adopt a unified position against contingencies, he said he did not favor regulation to achieve this.

“What does federal regulation ever do positively for any industry?” Cherkasky commented.

Aon Corp. Executive Chairman Patrick Ryan disagreed that a unified position is needed. “I can’t speak for another broker. It’s up to them,” Ryan said.

All agreed, however, that however compensation is paid, it should be fully disclosed.

Ryan also shed some light on Aon’s decision to sell its wholesale brokerage unit, Swett & Crawford. “It’s worth more to an independent buyer than to us,” Ryan said, noting that in today’s environment, both inside Aon and outside brokers may be reluctant to use a wholesaler that is owned by a broker because of perceived conflicts.

He stressed that Aon will, however, remain in the reinsurance brokerage business.

Marsh’s Cherkasky, whose firm bought risk mitigation expert Kroll in May 2004, said certain conflicts are acceptable “but only if they further clients’ interest.” He cited the ability of Marsh to bundle certain insurance, claims and risk management services as an advantage for clients.

As with compensation, however, all relationships must be transparent, Cherkaksy added.

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