BROKERS' EARS OPEN TO RIMS

Insurance brokerages welcome an opportunity to meet with members of the Risk & Insurance Management Society Inc. to discuss buyer concerns about industry consolidation and efficiency efforts.

RIMS members also are applauding the association initiative.

The call for the meetings, which are yet to be scheduled, was prompted by some risk managers' concerns over a memo detailing a placement strategy implemented by J&H Marsh & McLennan Inc. The broker is placing some Chubb Corp. business from regional offices instead of the brokers local offices (BI, Oct. 20).

Despite assurances from J&H Marsh & McLennan to the contrary, some risk managers expressed concern that this strategy could signal that the world's largest broker would increasingly dictate how all their accounts are handled, and that a trend toward regionalized business eventually could disrupt long-term relationships between policyholders and underwriters.

"I think risk managers are nervous. It's an unsettling climate," said Susan R. Meltzer, assistant vp-insurance and risk management at Sun Life Assurance Co. in Toronto.

As a result, RIMS plans to seek the meetings to assure policyholders' voices are heard as brokers and insurers become larger and fewer (BI, Oct. 27).

J&H Marsh & McLennan is eager to meet with RIMS to discuss policyholders' concerns, said Robert J. Newhouse III, executive vp and chairman of U.S. operations at J&H Marsh & McLennan in New York. "We are willing to discuss anything they want to talk about," he said.

"We would be glad to participate in that," Kenneth Pinkston, chairman of Willis Corroon Corp. of Nashville, Tenn., said of the RIMS initiative. "Risk managers as a group have a strong enough voice that their interests will not be overlooked by any broker. We plan to do everything we can to work with risk managers," he said.

"We're always interested in working with RIMS," said Gary M. Van der Voort, president of the brokerage services division of Arthur J. Gallagher & Co. of Itasca, Ill. "Their views are important to us."

"I think it's a really responsible thing for RIMS to be doing," said Scott K. Lange, director of risk management at Microsoft Corp. in Redmond, Wash.

"RIMS represents almost 4,500 companies and 7,000 risk managers," said David L. Mair, risk manager of the U.S. Olympic Committee in Colorado Springs, Colo. and vp-industry liaison and treasurer on the society's Executive Council. "We certainly hope that kind of critical mass of key players is going to generate some attention from the rest of the industry."

Mr. Mair said he believes "the key to the meetings is to identify ways we as risk managers and service providers can work to achieve the quality I hope we all desire."

Stephen M. Wilder, RIMS president and vp-risk management at The Walt Disney Co. in Burbank, Calif., said he hopes the result of the meetings will be that "the voice of the customer is heard in making the industry more efficient."

Mr. Wilder also noted that he thinks the issue was coming to the fore even without the J&H Marsh & McLennan memo as a catalyst. "I would really like to think that RIMS would have taken an active role in the absence of that memo," Mr. Wilder remarked.

But Mr. Lange called the J&H memo "a wake-up call" for risk managers. "Risk managers said, 'We need to stand up and help guide the industry'*" in its efforts to modernize the distribution system, he added.

J&H Marsh & McLennan in an internal memo circulated in August said that all property/casualty business placed with Chubb Corp. would be handled by the broker's regional Global Broking Centers (BI, Oct. 13). The broker and Chubb later said in interviews that the Global Broking Centers are to handle middle-market business, which the broker defines as coming from a policyholder without a professional risk manager.

J&H Marsh & McLennan emphasized that policyholders will realize benefits from a more efficient distribution system.

"Everything we do, including global broking, is designed to improve our services to our clients," said Mr. Newhouse, the memo's author.

Mr. Newhouse pointed out that J&H Marsh & McLennan always responds to client requests for local contacts or direct access to decision-makers at the brokerage and insurance company.

While some risk managers want a relationship with a local underwriter, others prefer to deal with decision-makers in the home office, Mr. Newhouse said. "We as brokers have to respond to both extremes and everything in between. If the client wants to retain the local underwriter in the loop, we're not going to shoot ourselves in the foot and say they can't do that."

The Global Broking Centers make the transaction of insurance more efficient, said Robert Clements, who helped develop the centers when he headed Marsh & McLennan's brokering operations in the early 1990s.

"The expense ratio of the insurance business was essentially the same in 1990 as it was in 1945 and this has frustrated customers and everybody in the business," said Mr. Clements, who recently retired from the Marsh & McLennan board but is still a consultant to the brokerage.

One of factors that helped maintain the high expense ratio was the high number of offices that insurers and brokers maintained throughout the country, he said.

By placing business through regional centers, brokers reduce their own costs and insurers are able to reduce their number of offices or the resources in those offices, Mr. Clements said.

The Global Broking Centers also give brokers and risk managers more leverage when they deal with insurers and make it easier to analyze risk information from a broad spectrum of risks placed through the centers, he said.

That information can then be used to develop new products and give policyholders better information on cost trends, Mr. Clements said.

By placing business through regional broking centers, J&H Marsh McLennan is following systems already well-established in other areas of the financial services industry, Mr. Clements said.

"If you were doing business with Merrill Lynch in Denver and you wanted to sell commercial paper you would certainly not expect Merrill Lynch to do that in the local Denver market," Mr. Clements said.

"If we are going to provide the best service to the customers we have to work together to find ways to reduce overall cost, and this was a way that costs were reduced rather substantially," Dean O'Hare, chief executive officer of Chubb Corp. in Warren N.J., said at a RIMS chapter meeting in New York last month.

Chubb itself prefers to maintain local relationships with customers, he said.

"Chubb has always been an organization that has very strong local connections with customers," Mr. O'Hare said.

But, in a frank admission, Mr. O'Hare said that given the clout of J&H Marsh & McLennan, Chubb has little choice but accept the Global Broking Centers.

"Marsh is our biggest producer and if Marsh in its infinite judgment wants to do business through regional processing centers, my job is to say 'Aye, aye, sir,' " Mr. O'Hare said.

Mr. Lange of Microsoft emphasized that the J&H Marsh & McLennan directive is only "one very major player's strategy in the marketplace" in which brokers are consolidating.

"Every broker approaches things a little differently in terms of how we execute our strategies," agreed Mr. Pinkston. "At Willis Corroon, we feel local service is very important. We have explicitly told our offices that we are committed to local service, especially for middle-market accounts."

Even so, Willis Corroon has consolidated its smallest accounts-those that generate less than $25,000 in premiums-into regional offices, Mr. Pinkston pointed out. Those accounts eventually will be centralized into a national location.

Mr. Van der Voort of Gallagher said regionalizing some types of business can benefit insurance buyers. "Regional consolidation of all business would fail miserably," he noted.

But for smaller buyers that don't have the same leverage as larger accounts, consolidation with similar-sized accounts creates efficiencies that buyers can share, Mr. Van der Voort explained.

While Gallagher's distribution system is structured differently than J&H Marsh & McLennan's, Gallagher provides its local marketing offices with regional or national support groups to provide services that local operations can't, according to Mr. Van der Voort.

Several risk managers say they are reaping benefits from consolidation.

"I'm gaining from it. I haven't seen the downside," said Richard C. Heydinger, director of risk management services for Hallmark Cards Inc. in Kansas City, Mo.

The merger of Johnson & Higgins and Marsh & McLennan Inc. has created a brokerage with resources that weren't available to Hallmark through M&M before the consolidation, Mr. Heydinger pointed out.

However, Mr. Heydinger emphasized that if there were any disruptions in his relationships with insurers as a result of changes on the brokerage side, "I would be upset. . . .I certainly haven't seen any of that."

"It's been a plus for me," agreed Eugene Kiernan, director of risk management and insurance at National Semiconductor Corp. in Santa Clara, Calif.

With coverages placed through J&H Marsh & McLennan and Aon Group Inc., Mr. Kiernan said he, too, is happy with the increased resources that the megabrokers can provide.

But he emphasized he values a close relationship with his producer. "If my contact was going to move into a regional office, I would be concerned."

Even with improved telecommunications, it is still important to have face-to-face contact, Mr. Kiernan said. "To me, that local contact is important."

Gavin Souter contributed to this report