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Posted On: Oct. 26, 1997 12:00 AM CST

RISK MANAGERS may have seen the future, and some don't like it.

We reported earlier this month on a J&H Marsh & McLennan Inc. internal memo directing that more property/casualty insurance business be placed with Chubb Corp. via six regional Global Broking Centers, rather than with local Chubb offices. The business placed through the Global Broking Centers is subject to a "placement service agreement" under which the broker receives a predetermined commission from the insurer for placing large volumes of business through the centers. Ostensibly, by placing more business through the centers, its compensation is likely to be higher than if the business still were placed through the local offices.

News of the memo sparked an immediate outcry among some buyers-and skepticism from other brokers and insurers-in some cases akin to Chicken Little's claims that the sky is falling. To them, the arrangement is seen as evidence of oft-expressed fears that the world's largest insurance brokers would throw their considerable weight around to their gain and the detriment of both insurers and clients.

However, we think the market needs to keep an open mind when thinking about this strategy. The memo raises several issues for buyers, brokers and insurers to consider.

To the buyer, such a strategy may be perfectly acceptable, as long as it is disclosed in advance that the broker is presenting the risk to the market in this way-and that it is receiving additional compensation.

As long as the client is aware of this arrangement up front, the client has an opportunity to accept or reject it. If the client rejects it, it can negotiate an alternative arrangement with the broker, or it can take its account elsewhere.

For commodity-type risks that do not require local underwriting attention, the arrangement makes sense-especially if the buyer shares in the savings this strategy purportedly offers. It also may be acceptable to the buyer in terms of the additional leverage with insurers to be gained by having risks placed with a limited number of more senior underwriters.

To the buyer who sees value in relationships with local underwriters-be it theirs or their broker's-this arrangement may not be attractive.

Odds are, though, the local underwriter has to turn to a higher underwriting authority to accept the risk anyway; this then may eliminate an extra middleman from the placement.

There also is nothing in the J&H Marsh & McLennan memo to suggest that the buyer will be denied an opportunity to present its risk to the underwriter that is dealing with the Global Broking Center. It is also worth noting that for risk managers in or near one of the six locations of the centers-Atlanta, Chicago, Dallas, Los Angeles, New York and San Francisco-the entire issue may be moot.

For the insurer, such an arrangement may offer greater efficiency in dealing with fewer distribution channels. It could allow the underwriters to focus their resources and expertise in fewer locations, which certainly would lower expenses. For years now, insurers have vacillated between having local vs. regional operating structures.

A question remains, however, whether any efficiency is truly gained by having such an arrangement with only one broker-albeit one of the world's largest-when the insurer must maintain a broader underwriting system and local personnel for all other brokers and agents.

In addition, the issue of whether it works for more than commodity-type business also is relevant for the insurer. If a risk presented through one of the six Global Broking Centers requires the insurer to send local personnel to assess the risk more thoroughly, does it really gain anything in terms of reduced expenses? The buyer and broker may be getting a break on costs, but the underwriting expenses are not reduced.

The arrangement is attractive to the broker on several levels. It replaces an uncertain profit-sharing arrangement with a certain reward for volume. It reduces the number of underwriters with which it must deal. And, in J&H Marsh & McLennan's case, the arrangement allows it to maximize the technological efficiencies offered by the World Insurance Network, an electronic network linking brokers and insurers.

It also gives the broker a more reliable source of information about rating and underwriting trends, as it is now dealing with fewer and more highly placed underwriters, rather than scores of underwriters nationwide that may offer varying terms and conditions.

To the extent that better information and greater efficiency translates into better service for the customer, the Global Broking Center concept is a winner.

The broker needs to be cognizant of the issues such an arrangement poses for its clients and markets. Perhaps most importantly, it needs to keep in mind if and how such an arrangement benefits the buyer and communicate those benefits to clients.

Unfortunately, the J&H Marsh & McLennan memo-which, granted, was intended for internal distribution-did not mention what the client gains from this program.

The key to making acceptable any new approach to placing business in the marketplace-no matter how effective the strategy-remains disclosure of what it will mean to the client. The buyer should be informed by the broker how its risk is being presented to underwriters and how the broker is being compensated for placing the risk in such a manner.

In J&H Marsh & McLennan's case, former J&H clients-some of whom originally chose J&H to avoid M&M's Global Broking Centers-in particular should be given a choice of how their business is to be handled.

Ultimately, buyers do have a choice. If they don't like the system, and the broker is unwilling to alter it to suit them, the buyer can choose another broker. Even if that alternative broker-be it another large international broker or a regional broker-costs more, the client still has a choice.

J&H Marsh & McLennan is entirely within its rights to decide how it wants to place business. Many in the industry agree that the current distribution system is inefficient, and this is one attempt to fix that.

It may not be the right approach, and other brokers and insurers may find more success handling business differently. Only time will tell.