DEBATE TAKES ON INSURERS' COMPENSATION OF BROKERS

SAN DIEGO-Policyholders should be told of any compensation insurance brokerages get from insurers, a risk manager contends.

Even better, brokerages should not charge insurers contingent commissions for bulk business at all, she said. If brokerages think their current fees and commissions from policyholders are insufficient, they should increase them rather than seek extra compensation from insurers, she said.

Brokerage executives disagreed.

Policyholders benefit from the strong relationships that brokerages forge with insurers, said one brokerage executive. And the contingent commissions compensate brokerages for services they provide to the insurers, such as product developments, said another.

This was just one of a wide range of issues concerning consolidation in the insurance industry discussed at a debate during the 36th Risk & Insurance Management Society Inc. annual conference recently in San Diego.

Other issues taken on by the panel of two brokers, two insurers and a risk manager included the reasons behind the recent spate of insurer consolidations, the prospect of further consolidation, and the quality of insurer and brokerage services.

The issue of contingent compensation should be out in the open, and all risk managers should be aware of the payments brokers often get from insurers in addition to the fees and commissions paid by policyholders, said Susan Meltzer, assistant vp-insurance and risk management at Sun Life Assurance Co. of Canada in Toronto.

Some insurers pay brokers contingent commissions based on the volume and on the profitability of certain books of business.

"I don't have a basic problem with volume commissions; what I have a problem with is that these arrangements have not been disclosed," she said.

Brokers represent policyholders, so all of their compensation should be paid by policyholders, Ms. Meltzer said. "This is not an excuse to pay brokers less. I would be willing to increase my fees and commissions in order to bring the control of costs and broker compensation to the risk manager," she said.

But strong relationships between brokerages and insurers provide benefits to policyholders as well as to the brokerages and insurers, said J. Patrick Gallagher Jr., president and chief executive officer of Arthur J. Gallagher & Co. in Itasca, Ill.

"Where we have built volume with an insurance company, we have a better relationship," he said. And as a result of that better relationship, brokers are more able to help ensure that claims are paid and any problems between insurers and policyholders are solved, he said.

"I don't think there is anything wrong with being compensated for that," Mr. Gallagher said.

Additionally, brokers provide services to insurers, and that is reflected in the contingent commissions, said John T. Sinnott, vice chairman and CEO of J&H Marsh & McLennan Inc. in New York.

For example, brokers provide "intellectual capital" and product development services to insurers. It is only fair that insurers, not policyholders, should pay for those services, he said.

Contingent commissions are a reality of the marketplace, said Jay S. Fishman, CEO of the commercial lines division of Travelers Property Casualty Corp. "It is an area where you as customers will make decisions on what value is and what value isn't and whether you are being well served," he said.

However, policyholders should be informed about the payments, Mr. Fishman said. "As long as it's all above-board, we don't have a problem with it," he said.

On the other hand, Liberty Mutual Group does not pay contingent commissions, said Edward G. Troy, executive vp and manager of national accounts at the Boston-based insurer. "We've made the decision that we don't pay insurance brokers," he said.

The issue of contingent commissions has come to a head with the increased consolidation of the brokerage industry over the past few years. That consolidation has led to increased clout for the largest brokerages.

Consolidation of the whole industry is likely to continue, said Mr. Troy. "There's been more changes in the past five years than we'd seen in the 20 years before that, but fasten your seat belts, because I think it is going to continue," he said.

Insurers and brokerages both need to be large in order to invest in technology and to extend their global reach, Mr. Troy said.

The need to have substantial capital was the driving reason behind the sale of the former Johnson & Higgins to Marsh & McLennan Cos. Inc., said Mr. Sinnott of J&H Marsh & McLennan.

Other reasons behind the continued consolidation include the slow revenue growth and substantial excess capital most insurers currently have, said Mr. Fishman of Travelers. "It will take additional consolidation for the marketplace to correct itself," he said.

Risk managers think the marketplace also could improve some of its services, according to the results of a survey of risk managers' views on service providers released by RIMS at the conference (BI, May 4).

The quality score card was developed by RIMS and the Quality Insurance Congress. Overall, brokers and insurers received low marks in satisfaction and performance.

Travelers ranked average for satisfaction and above average for performance but still was "disappointed" by the results, Mr. Fishman said. "Just wait 'til next year," he said.

J&H Marsh & McLennan ranked below average for both satisfaction and performance. Mr. Sinnott would not comment on the survey, saying it had come out only the day before the debate and he had not yet read it. "But listening to clients is very important, and we will listen to all the feedback that we get," he said.

Arthur J. Gallagher was not ranked in the survey, as there were too few responses that mentioned the brokerage. Mr. Gallagher said he was disappointed in the way the survey was conducted and analyzed.

The survey obtained only enough information to rank five brokerages, Mr. Gallagher noted. And, he said, as any survey of this kind should contain a 5% deviation, it did little to measure any differences among the brokers. The difference in marks among the top four brokerages was not more than 10 points for both satisfaction and performance.

Stephen M. Wilder, RIMS president during 1997-1998 and vp-risk management at The Walt Disney Co. in Burbank, Calif., moderated the debate.

Photo/Graphic: The 36th Risk & Insurance Management Society Inc. annual conference in San Diego enabled risk and insurance professionals to further their knowledge of risk management and employee benefit issues, as well as meet industry service providers.