Brokers gain from premium funds, but most buyers don't mind

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For most risk managers, the practice of brokers collecting buyers' premiums--as well as interest income earned on the money before remitting it to insurers--is not a major concern, buyers and observers say.

Efficient management of insurance premium payments is part of the value and service provided by brokers, brokers say.

The majority of risk managers agree that cutting one check to a broker is simpler than a direct-bill system to multiple insurers. In certain cases, though, buyers are bypassing brokers and paying insurers directly.

Under the current system, buyers commonly pay insurance premiums via their broker, who places the funds in an interest-bearing premium trust fund account before sending them to insurers.

For most risk management business, said Tom Golub, president and chief executive officer of Beecher Carlson Holdings Inc. in Atlanta, the hold time in which a broker can keep premiums is 30 to 45 days, while smaller agency business tends have hold periods of up to 90 days.

"Certainly, the top risk managers we deal with understand that, and they're not going to pay us Day One, either," said Mr. Golub. "So you're probably talking about money being held incrementally for a week or so."

For each premium dollar that New York-based Marsh & McLennan Cos. Inc. collects from U.S. clients, the average holding period is about 10 days, a company spokesman said.

MMC reported $180 million in fiduciary interest income in 2006 across the various MMC operating companies.

According to a spokesman for Chicago-based Aon Corp., Aon in 2006 earned $161 million "in investment income from holding client premiums."

"The process wherein the broker or agent holds the premium for a period of time is really steeped in tradition, and perhaps the old industry custom and practice, (where) the local agent was the local representative of the insurance company and collection of premium was one of its many functions," said Timothy J. Cunningham, a principal with OPTIS Partners L.L.C. in Chicago.

"It's never been a great issue for us and we've never had a lot of discussion from either our clients or our carriers on the topic," said H. Wade Reece, chairman and president of Raleigh, N.C.-based brokerage BB&T Insurance Services Inc.

In fact, there has not been much talk about the subject--until recently.

At the Risk & Insurance Management Society Inc.'s 2007 annual conference, held in New Orleans in May, the question was posed to a panel of brokerage CEOs: "Why do brokers continue to hold on to buyers' insurance premiums before remitting them to insurers?" When pressed, the heads of several large brokerages said they would be willing to discuss the issue individually with clients.

The issue made headlines previously when Michael Segal, the former owner, chairman and CEO of Near North National Group Inc. in Chicago, was sentenced to prison in late 2005 after being found guilty of taking millions of dollars held in the brokerage's premium trust fund account for his personal use (BI, Dec. 5, 2005).

Near North National Insurance Brokerage Inc., once the 18th- largest broker of U.S. business, based on $199.9 million in 2002 brokerage revenues, also was convicted on certain related fraud charges.

Brokers say collecting client premiums is a needed service they offer to customers.

"For a variety of reasons, U.S. clients and insurance companies typically prefer that brokers act as the intermediary in the premium billing process and, in doing so, brokers provide a range of useful services that typically involves significantly more than just forwarding a check," a spokesman for MMC said in an e-mail. "Additionally, since placements often occur in down-to-the-wire situations, clients typically feel most confident relying on their broker to ensure the premium payment gets to the right place and gets...recognized by the insurance company."

"Billing and collection is often a costly activity, involving multiple insurance companies across multiple coverage lines and at times requiring tax filings, affidavits and surplus lines issues," the MMC spokesman added. "Rather than receive and process each invoice separately, the efficiency gained from amalgamating or making batch payments lowers overall costs for everyone, including the clients."

Joe Plumeri, chairman and CEO of Willis Group Holdings Ltd., said: "It is important in the process of administering premiums that we are able to collect premiums from clients and match them with the correct insurers. In the absence of being able to do that, you got clients with 27 to 30 different checks to different insurers, waiting for a receipt for all of that...is very inefficient."

The issue of brokers holding buyers' insurance premiums before remitting them to insurers is a "limited concern" for Carolyn Snow, director, insurance risk management at Louisville, Ky.-based Humana Inc.

"The ease of paying the broker directly, with the ability to reasonably manage the payment date, offsets our concerns about them holding our funds," Ms. Snow said. Humana's broker is Willis.

"We have a very complicated system of accounts payable," said Scott B. Clark, risk and benefits officer for Miami-Dade County Public Schools, the nation's fourth-largest school district.

"For me to be able to pay that to my broker, with 40 to 50 participants, and get it paid properly is difficult enough." he said. "If I had to make every one of those carriers a separate vendor, it would delay the process and be much more work for the entire accounts payable system."

"If you are going to put faith in your agent or broker...but you don't trust them enough to pay the people with whom you are doing business, then I think you have bigger problems than you realize," Mr. Clark said.

"There's a few clients who don't like (brokers collecting premiums) at all, and there is a larger number of clients who don't pay attention to it at all," said Richard Betterley, president of Sterling, Mass.-based Betterley Risk Consultants Inc.

"I have not seen any particular trend to writing the premium checks directly to the carriers," Mr. Betterley said. "My sense is that the brokers are interested in controlling the flow of premium" and "writing checks directly to the carrier is something that is actively discouraged."

But a bad experience led Terry Fleming, director of risk management for Montgomery County, Md.--who is also director of external affairs for RIMS--to start paying the county's insurers directly about five years ago. "We got a notice from the insurance company that they were going to cancel our policy because the premium wasn't paid. We contacted the broker, and lo and behold, they were holding the money." Mr. Fleming declined to identify the broker.

"When we first discovered it, we told them we were going to change the way we do business. They weren't happy," said Mr. Fleming. But, in the end, Mr. Fleming told the broker "we would just move our business unless we were able to come to an agreement on it."

"I do think it's part of disclosure and transparency, and I think all risk managers have the right to know (information about brokers' holding on to client premiums) without having to ask for it," Mr. Fleming said. "But, it never hurts to put it in writing in your contracts that you have with your brokers."

Gloria Gonzalez and Sally Roberts contributed to this report.