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Time to avoid conflicts
Published May 7, 2007
Since 2004, Willis Group Holdings Ltd. Chairman and Chief Executive Officer Joe Plumeri has been outspoken in his opposition to contingent compensation for placing risks with underwriters. State attorneys general recently approved a new form of supplemental compensation developed by a few national insurance companies. However, Willis was the first major broker to swear off contingent payments, and announced April 30 that it would not accept the new form of compensation, either. Mr. Plumeri explained Willis' position on this and other topics in a recent interview with BI Editor Regis Coccia.
Why is Willis not accepting supplemental compensation?
A. The whole supplemental compensation issue, in my opinion, is much more than just supplemental compensation. It's much more than whether supplemental compensation feels and looks like contingents. And it's much more than a sense of somebody saying from a regulatory point of view they're OK. It's much more than somebody saying it's legal.
I think the industry has got to rise above all of that and begin to define and describe what it is from a principles point of view. Do you feel that it's the right thing to receive compensation and be in conflict with your clients? That's really the issue here. When I was little, we used to say as kids when we did things, "There's no law against it," immediately suggesting that because there's no law against it, that makes it OK.
I think the industry is a very important fabric of society; I've said that many, many times. If you're that important a fabric of society, that means the standard by which you operate, the standard by which you live, has to be so principled it has to even be beyond what a regulator tells you to do. Somebody doesn't have to parachute in and tell you what's right. You have to feel with passion what is the right thing to do. That's where we're coming from. And I think that's where the industry has to come from.
When I look at supplemental compensation, I say to myself, irrespective of what a regulator said you can do, in my opinion, it's the same as a contingent. Whether it's prospective or retrospective, the fact of the matter is you're getting paid to do something that rewards you for doing more business with a carrier. The reward, if we're building a great business, a value-driven business, should ultimately come from the client. If you do a good job, the client should pay you. If you do a really good job, the client should pay you more. If you are innovative and you are imaginative and do all the kinds of things that will make the industry better, then the client will pay you and, therefore, there is a relevance between the imagination and creativity and what you do for your client and the way the client pays you. Not because you do something over here that compensates for, maybe, a lack of innovation and a lack of creativity.
So when you put all of that together, in our mind as a company, we don't think that's the way we're going to grow. We don't think supplemental compensation--contingents, whatever you want to call them--is the right thing to do. On a principled basis and the basis of being able to appreciate and understand who our clients are, and who we're out there to be the advocate for every day, is the way we feel, and we feel that passionately.
What will it mean for Willis if its competitors accept supplemental compensation?
A. I don't think it will mean a thing. What people decide to do is their business. They have a set of values. We have a set of values. They're going to go to what they think in their hearts is the right thing to do. When you show leadership...you either make a decision that you're going to follow a trail made by somebody else or you're going to cut a path and leave a trail so that others follow you. Cutting a path's hard, by the way. You've got to get the machete out and do the cutting. It's tough. You perspire; you get bloodied. I really don't mind the machete thing, if where we're going is the right place to be. I can't answer why other people may or may not take them, I can only tell you why we don't. We shouldn't be making decisions based on what other people do. We should be making decisions based on what we think the right thing to do is, and that's one of the ingredients of leadership....
I also think (accepting supplemental compensation) stunts our growth. If you think there are all sorts of ways you're going to get paid, it stunts our growth as it relates to being imaginative, creative and understanding fully that the person who pays you at the end of the day is your client. For all those reasons, and you can tell I'm passionate about it, we don't need them.
Insurance agents and brokers play different but valuable roles in distributing insurance products. How well do Willis clients understand the difference? Is there something the industry should be doing to educate the consumer about the difference?
A. If agents want to disclose that they represent an insurance company, I think it's terrific that they get paid by the insurance company. Just like we're suggesting by virtue of my definition that our client is not the insurance company but the client we do business with and they should pay us, it's the same thing. You have to declare who the client is, who you're representing. Once that declaration is made, you're perfectly within your rights--in principle and regulatory wise--to get paid by that person as long as everybody knows who you're representing.
As it relates to whether our clients know that, I think more and more they're beginning to appreciate the distinction. In the past, it was accepted practice, the way business was done. As I talk to our clients about the distinctions, it's becoming clearer and clearer. I get questions about who do you represent, who is it you're advocating, for whom are you client advocates? It's certainly clearer than it was three years ago, when the whole issue was brought up.
That kind of transparency is not something you can hide behind. Declaring who you represent is important, but I also think there are those people in various camps who say, "As long as I tell you how much I make, then what difference does it make? It's (in) your court. Now I told you, what are you going to do about it?" That's kind of childish to me. It goes back to the principles. What are your principles? Who do you represent? If you think it's a conflict, don't do it. Even though you might tell somebody and say, "I told you," like a kid saying it's not against the law, there should be a higher order in our business. You can't hide behind transparency and say "I disclosed it and they don't care, then I'm OK." How about me feeling it? How about me going to bed at night and saying "It's not the right thing to do." Do what's right. I think the whole industry will be better off for it.
Some brokers say there is an unlevel playing field, with some brokers not accepting contingents and others taking them. What does that mean for Willis in competing as a provider of insurance services?
A. First of all, it's unfair that there's an unlevel playing field. It goes to the issue of governance in the industry. There's a governance issue here. The way we're governed in the United States is by 50 different regulators, and as a result, you've got 50 different outcomes to a situation. That's wrong. It inspires inequality and discrepancy, and it's not the way the rest of financial services are run. The rest of financial services are run in a way where a single regulator says everybody's got to do this and everybody does it.
For years I dealt with the SEC and whatever the SEC did, we suggested that's the way we do it. If you decide to be regulated by a federal regulator in banking, that's the way you go. There are places, by the way, where you choose to be regulated by the state, because you only want to do business inside the state. But at least it's fair throughout. I would rather have a model that has worked quite well in the U.K., which is the FSA. It's a single regulator that suggests things that should be done to make the industry better. It's very level, because everybody plays by the same rules. A recent case in point: the FSA suggested that everybody in the insurance community...be contract-certain by January 2007, and they made that suggestion in the middle of 2005. They got everybody together and said look, it's the right thing to do that within 30 days of inception of a contract, that the policy be delivered and the wordings get done. By Jan. 1, 2007, it was all done. There wasn't unevenness. There wasn't one state saying you could do it and one state saying you shouldn't. All clients who do business with people in the U.K. are contract-certain. The FSA also said if you don't do that, we'll take corrective action. Not take corrective action first, then make sure everybody does it and then when it's done, it's done unevenly. It just doesn't make any sense.
I'm an advocate of an optional federal charter. Like the banking business does, if you want be under the jurisdiction of the state, then stay in the state. But if you want to go across all sorts of boundaries, be regulated by a federal charter not unlike banking does.
Does it affect our business? It probably does. I don't know when we're doing fee business that somebody is offering a lower fee because they're getting compensated over here, and as a result it's OK. I haven't done any science to tell me, but probably it affects me. It affects me more on a principle basis. I just don't think that it's right that some people do it one way and some do it another way, especially when there was such furor over the whole issue, and now the field is left unlevel after everything was said and done. What did we accomplish as an industry? Did we move the ball? I don't think we did. That worries me more than whether there's a lack of competition.
Is there room for alternate kinds of compensation in the London market, where brokers traditionally have performed more functions for underwriters?
A. In the London market, we've set up facilities akin to an MGA, which under my definition of who do you represent, I have no problem with. As an MGA, clearly you represent the underwriter. As such, there is no conflict because the client knows who you represent. So I guess there are some differences, but at the end of the day, you're still representing clients. In the U.K., we do that all the time. We're still in a position to get paid by the client, whether it's a fee or a commission. I think there are subtleties in the London market, but not that many that would cause us to believe that the FSA type of arrangement wouldn't apply in other parts of the world. By the way, it's become topical because the European Commission has gotten into issues of transparency. What started out to be a U.S. issue, I can tell you is not a U.S. issue. It is an issue everybody is inquiring about in one form or another.
What are some obstacles to innovation and creativity that the industry can address?
A. You've got to start with service. I just don't think service has been a big deal in this industry. I don't know why. Who knows? There's such movement of people in the industry and in accounts that you have to ask yourself why does that happen. If people are happy, hopefully with a single provider, that really shouldn't be the case. So there's got to be something wrong in the servicing. I think we've spent too much attention and time in the acquisition process, which is "Yea, we won an account," without the proper relevance and significance and vigilance that we give a client. It's almost like you win 'em and then "Well, ah, they're put over here." That's an endemic problem in the industry. It's very relationship-driven. That's fine. It's good that people have relationships with clients, but it ought to be backed up with proper service that we have the responsibility to be able to give.
Why do people allow themselves to get a policy in eight months? I don't know. Why is it generally accepted practice that that's the case? When I brought this up at RIMS a couple years ago when I gave my speech, everybody applauded my inquiry. I said "Why is that the case? Nobody else does that." When I ran a bank, I didn't give anybody a loan unless I said, "Sign this document and tell me when you're going to pay it back." It would've been unheard of; I'd have gotten fired if I did that. You do a normal transaction at a drugstore and there are some drugs you've got to sign for, which tells you what the drug is, the term and condition, what you're taking.
But in the insurance industry, for some strange legacy reason, we don't make that a big enough deal. The fact you don't get (a printed, complete) policy in eight months is a large reason why a lot of the claims are disputed, because there's no frame of reference. If there's no platform upon which there's an agreement, then any mediator would tell you that you have crisis all the time.
Well, in this case, there's no platform because there's no policy, and if anything happens in that period of time before the policy's delivered, you've got a crisis that occurs because there's an absence of relevancy. I think that's got to be cleaned up. It's easier to accomplish in the U.K. because you've got a regulator who says you've got to clean it up. Secondly, we as (U.K.) brokers have an opportunity because we get in the mix of paying the claims and providing contract certainty. We do that. In the U.S., we're completely dependent on the insurers to do that.
I would love, and I called for this when I gave my RIMS speech, that clients, brokers and insurance carriers should get together, sit in a room and figure out how we're going to do this. It's vital that we do this. But for some strange reason, we can't seem to get everybody in the same room talking about what I think is the Holy Grail of what we operate. To think of the fact that people buy insurance for the purpose of--God forbid--something bad happens, they get paid. Something bad happens, and then there's a long wait to see whether they get paid or not, or what they bought; it just doesn't seem to make a lot of sense to me.
It represents the core of what we're doing. Every religion has its ceremony. And I think that insurance should have its ceremony. And that ceremony should be "This is what you bought and this is when you're going to get paid."
Sarbanes-Oxley has created a lot of administrative challenges for the insurance industry. Has the industry made a lot of strides in terms of governance?
A. I think we talk about it a lot, but frankly, I can't point toward anything from a governance point of view that suggests we've done that. I think companies certainly stand out among other companies that do that, but I don't get a real sense that the government or the industry has said "This is the way we're going to conduct ourselves and govern ourselves."
I think Sarbanes-Oxley is a great example of a rules-based society where you wait for something to happen, which was all stimulated by Enron and WorldCom and Tyco. Why do you have to have that happen? The government swoops down and says you've got to do all those things, which leads people to believe that everybody operates the way those three companies did.... Not only does it give a bad impression to the rest of the corporate world--that somebody had to swoop down and create that and create Rule 404 and all the other things--but the impression that it gives is that people don't have a sense of right or wrong, that somebody else had to do it. It's the same issue with contingents, the same issue we had with Eliot Spitzer. It's the same problem. You've got to have people trust you and know you want to do the right thing, irrespective of what the law is.
Now, if you make it so regulated, which I think is wrong, but it's only going to be...regulated if the people don't create...a sense of principle so that the regulation doesn't have to happen, only then are people going to take proper risks and use their proper imagination and use their proper creativity. If you look around the world, the way the world was built, it was built upon people being imaginative and taking risks. Too much regulation disallows that. That's why I'm totally in favor of principles-based regulation rather than rules-based, because it stifles the imagination and stifles what built the world.
What's the next chapter for Willis? What's ahead?
A. The next chapter for Willis, which is "Shaping Our Future," is to marry the great value that we provide and allow that value to be differentiated by the use of technology, by the use of imagination, by being able to create the right products for segments of our clients against the things that we really do well (and) deliver it properly so our clients really see the value that we deliver...and do that in a way that helps our clients out by delivering the full resources of our company.
One of the legacies, the mysteries, of the business is that as a global broker, history has not suggested that global brokers have been able to take all the resources they have around the world and get people to work together in the interests of the client. If we could pull that off in shaping the future, what a wonderful thing we'd have done. Resources aren't our problem; it's massing those resources and delivering them to the client uniformly through the use of advocates, technology and people working together (that) is going to do that. That's the next chapter.
You've said that contingents are not going to go away on their own, that they have to be regulated away. Do you think there's momentum to make contingents go away?
A. Not now, no. But that doesn't mean I should be less vocal about it. Because if you look at the revenue it generates for companies, the profitability it generates for companies, why should they want they do that? It means too much. I certainly appreciate that and I understand that, so that's why I think there has to be an intervention of some kind.
Not unlike the Spitzer intervention. But the problem was it left a field that was rather uneven, and that's not the right thing to do. But I do believe that progress will be made along those lines. There are plenty of references in history where some voices in the wilderness were not heard.
I just want to see the industry thrive, I want to see the industry grow, I want to see the industry flourish. I want the world to embrace the goodness of what we do. That's the centerpiece of why I believe what I believe. This is a great industry. But you've got to be able to understand and embrace the greatness and behave appropriately so it can grow.