One Year After Spitzer, Brokers and Risk Managers Report Shifting Roles

November 3, 2005

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

In a survey of more than 500 corporations and governmental entities by Advisen, risk managers at a wide array of U.S. and Canadian organizations seemed to have put concerns surrounding contingent commissions and other compensation issues behind them, but survey results suggested that the investigations have produced changes in how risk managers work with brokers on the placement of insurance programs.

Almost half the buyers who participated in the survey 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 of the responding risk managers 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 of respondents 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.

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 in the next 18 months. 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, who commented anonymously, was that while the end of contingent commissions has not altered the amount of compensation earned by their broker, respondents wondered why the insurance companies have not reduced their premiums by the amount that was previously paid to brokers in the form of contingent commissions.

This is the third survey of risk managers on contingent commission issues conducted by Advisen. The first survey was conducted in May 2004, shortly after New York Attorney General Eliot Spitzer announced a probe of insurance broker compensation practices. Key findings from that survey were that two-thirds of risk managers regarded contingent compensation plans as a conflict of interest for a broker, and over 80 percent were less than fully satisfied about the level of disclosure they received from their broker about compensation received from contingent commissions.

The second survey, conducted in November 2004, addressed the issues of how commercial insurance buyers view insurance brokers. In those survey results, risk managers expressed anger over the potential illegal and anti-competitive practices alleged in the suit and advocated new transaction models involving greater transparency. However, few called for the end of contingent commissions.

“The sentiments of risk managers on this issue have clearly evolved since we first surveyed the market and it will certainly continue to evolve,” said Bradford. “The constant across all of our research in this area in the last 18 months has been a uniform desire for better and more efficiently delivered information which is the ultimate equalizer in the continuous balancing act between risk manager and brokers.”

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