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NEW YORK-A J&H Marsh & McLennan Inc. directive to channel property/casualty insurance placed with Chubb Corp. through regional rather than local brokerage offices is sparking fears a mong some risk managers that the world's largest insurance broker increasingly may dictate how all their accounts are handled.The Risk & Insurance Management Society Inc.'s Executive Council is expected to discuss the memo and the issues it raises at a meeting later this week.J&H Marsh & McLennan and Chubb both contend, however, that the strategy is limited to middle-market accounts and is designed to improve efficiency, which they say accrues to the benefit of buyers.
J&H Marsh & McLennan also denies that the memo, obtained by Business Insurance, signals intention to pressure risk managers to use the Global Broking Centers."Over time, our objective is to have Global Broking facilitat e placement for all of our business, but not by dictate," said Robert J. Newhouse III, executive vp and chairman of U.S. operations at J&H Marsh & McLennan.The August memo specifically refers to property and casualty business the broker places with Chubb, and not to financial and professional insurance lines, marine and energy and aviation business, Mr. Newhouse said.Nearly all of the property/casualty business that J&H Marsh & McLennan places with Chubb is middle-market business and not large-account, or risk management, business, he said.The broker defines middle-market as a company without a professional risk manager.The Global Broking Centers were established by Marsh & McLennan Inc. in 1995 prior to its merger with Johnson & Higgins.
The six centers in the United States are New York, Chicago, San Francisco, Los Angeles, Atlanta and Dallas.The centers are linked by computer with insurers. Account managers nationwide deal with Global Broking Center brokers, who place the risks with insurers connected to the centers, rather than through the local offices of the insurers.In the memo, written by Mr. Newhouse and sent to regional J&H Mar sh & McLennan managers, he noted that the business placed with Chubb through the Global Broking Centers is subject to a "placement service agreement," or PSA.The PSA grants J&H Marsh & McLennan an additional commission for the placement of large volumes of business through the centers.Other U.S. brokers have commission agreements with insurers providing for the payment of contingent commissions based on the prof itability of the business they place with insurers.
Based on 1996 placements, J&H Marsh & McLennan has determined that $60 million in premiums this year would be placed locally and not produce the additional commission provided by t he PSA. Mr. Newhouse would not say how much additional commission the PSA agreement provides."Because the bulk of the Chubb business placed outside Global Broking is primarily middle-market business, it was decided that all Chubb business is to be placed through Global Broking, whether coded (large accounts) or (middle market)," the memo said.Exceptions to the policy of placing Chubb business via the centers will be made on a case-by-case basis, the memo s aid.Offices that don't place their Chubb property/casualty accounts through the Global Broking Centers will forfeit their commission, which will be placed in a separate corporate fund, the memo noted.
This will penalize local broke rage offices.Risk managers contend the memo could indicate that J&H Marsh & McLennan increasingly will use its clout and influence in the market to push more of its large policyholders and their insurers to use its Global Broking C enters, rather than place those risks locally.
The memo runs contrary to the predictions made by large brokerages that they would be able to provide better service as a result of the consolidation among brokerages, said Mark A. DeLi llo, vp-risk management at Celotex Corp. in Tampa, Fla., and first vp of RIMS."It would seem to me that they are looking at things from a perspective that puts the policyholders' interests second," he said.By using the Global Bro king Centers, J&H Marsh & McLennan clients could be giving up local relationships with underwriters and may receive little benefit in exchange, said Mr. DeLillo, who uses Aon Group Inc. to place his risks."I think they will use th eir clout to extract larger commissions.
One would hope that they would also use their clout to secure lower rates for policyholders, but the memo doesn't indicate that," Mr. DeLillo said.J&H Marsh & McLennan's Global Broking Cent ers are an example of how large brokers may try to control the market, said Scott K. Lange, director of risk management at Microsoft Corp. in Redmond, Wash."They seem to be flexing their muscles and controlling access to the marke ts and saying, 'OK, we are going to play by our rules now," he said.Mr. Lange, who uses J&H Marsh & McLennan, said he would not want to give up his existing relationship with local underwriters."I have a very good working relat ionship with Chubb underwriters in Seattle. It's a real partnership, and if J&H Marsh & McLennan wants all of its Chubb business to go through San Francisco, I'm not sure that Chubb will find it profitable to staff its local office ," Mr. Lange said.The insurers accessed via the Global Broking Centers will not have any personal relationship with him, Mr. Lange said.If J&H Marsh & McLennan seeks to pressure more than its middle-market accounts into using the Global Broking Centers, it is likely to lose clients to other brokers, said David R. Haight, director of risk management at CF Industries Inc. in Long Grove, Ill."People sometimes forget where the real control is," he said.J&H Ma rsh & McLennan's Mr. Newhouse said that risk managers should not be concerned that they will be pressured to use the Global Broking Centers to access U.S. insurers.The system is primarily used for middle-market clients and for larg er clients that need J&H Marsh & McLennan's excess and surplus lines brokerage units to access surplus lines and overseas insurers, he stressed.Those risk managers that choose to use the centers, though, will receive several benefi ts, according to Mr. Newhouse.
"The idea is to improve efficiencies and cut costs and the benefit of that will accrue to clients, markets and brokers," he said.All of J&H Marsh & McLennan's middle-market business with other major insurers is placed through the centers. The broker has negotiated varying commission structures with each of those insurers.The Global Broking Centers will reduce costs for brokers, insurers and middle-market policyholders, said a spokeswoman for Chubb in Warren, N.J.Chubb benefits from the arrangement by replacing a contingent profit sharing commission, which could vary from year to year, with a fixed payment of the PSA, she said. Also, it is more efficient for Chubb to consolidate its middle-market business in regional centers, she said.It's more efficient because Chubb underwriters will be dealing with fewer brokers, which frees up staff to focus on other business, the spokeswoman said.One property/casualty insurance company executive, however, said there may be little advantage to insurers in using J&H Marsh & McLennan's system, as long as the insurers still need to maintain their office networks to deal wi th other brokerages.An executive with Aon Group Inc. said it was unlikely to adopt a comparable regional system for its middle-market accounts."Middle market business, we believe, is driven very much by relationships and it is imp ortant to respond locally," said Teresa Pahl, president and CEO*of Aon Enterprise in Chicago, which provides commercial insurance support to small businesses and entrepreneurs.The need for insurers to maintain networks of nationwi de offices, though, will likely diminish in the future, driven especially by technological changes, said Mr. Newhouse."We think that in the future, the economics of the industry will not permit that, and that's why we support thin gs like WIN," he said.WIN, the World Insurance Network, is an electronic network being developed by the world's largest brokers to allow subscribing brokers to communicate with insurers. The Global Broking Centers will access the WIN system, Mr. Newhouse said.While Chubb sees economies in dealing with J&H Marsh & McLennan's Global Broking Centers, it nonetheless intends to maintain its network of local offices, said the spokeswoman."Notwithstanding the pre ssure to consolidate, we remain committed to the independent agency system and serving regional and local producers and their customers through our U.S. network of 54 branch offices," she said.
Not all risk managers oppose the conc ept of the Global Broking Centers.The system will provide advantages to large clients that use the centers, said Lori Varner, risk manager at Coca-Cola Enterprises Inc. in Atlanta.
Coca-Cola Enterprises this year for the first time used the Global Broking Center in New York to gain added leverage in the market for the lead on its casualty umbrella coverage program, she said. She used the New York office because the Global Broking Center in Atlanta only handle s middle-market business."We have seen that it's the best of both worlds. I have the local brokers that have placed the business before and are familiar with the account, and we utilize the Global Broking of J&H Marsh & McLennan and that gives us additional leverage," Ms. Varner said.Despite placing the risk centrally, Coca-Cola Enterprises will continue to be serviced by the insurer's employees in New York and Atlanta, she said