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Marsh, N.Y. alter pact to permit insurer fees

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NEW YORK—Marsh Inc. soon will begin accepting certain fees from insurers for brokerage transactions under an agreement with New York Attorney General Andrew Cuomo and Superintendent of Insurance Eric Dinallo.

The Aug. 3 agreement amends Marsh & McLennan Cos. Inc.'s $850 million 2005 settlement with New York authorities, which limited its form of compensation to fees from clients and commissions from insurers in brokerage-related transactions.

It is the fourth amendment (see box) that has been made to the agreement MMC reached more than two years ago to settle charges that it rigged bids and steered clients to insurers that paid the highest contingent commissions. Most recently, Marsh gained authorization to accept additional profit-based commissions from insurers on business in which it acts as a managing general agent or underwriting manager (BI, Aug. 28, 2006).

The Risk & Insurance Management Society Inc., which in June called for a prohibition on all "placement fees" paid to brokers by insurers, has given Marsh's latest agreement its stamp of approval.

Chicago-based Aon Corp. and London-based Willis Group Holdings Ltd., which reached similar agreements and subsequent amendments with New York, say they expect to reach a similar agreement regarding the insurer fees.

"Aon has been in discussion with regulators in New York over these same issues, and they have assured us that they are prepared to extend identical treatment to Aon and others," a spokesman said.

As for Willis, "Any enhanced regulatory flexibility that we may be granted will be applied against our unwavering principles," Joe Plumeri, chairman and CEO of Willis, said in an e-mailed statement. "It is important that we reiterate our absolute commitment to our principles--namely we will always be compensated in a manner that promotes the best interests of our clients."

Marsh Inc.'s latest amendment was revealed last week by Brian M. Storms, chairman and chief executive officer, during the company's second-quarter analyst call. He declined to discuss details, noting that Marsh will be making a public statement soon.

He did note, though, that Marsh is in "active discussions" with insurers about the new fees. Mr. Storms also stressed that the fees are a "completely different form of revenue from supplemental compensation," which he also specifically addressed in the analyst call (see related story).

In a later interview, a Marsh spokesman gave an example of how the brokerage might negotiate a fee from an insurer under the new arrangement.

"If we consistently take more time to review insurance policies issued by Carrier A than we do for Carrier B, we think it's reasonable that we should be allowed to charge Carrier A a fee for the additional labor and other costs required to process its policies," the spokesman said.

"It's too early to tell" how much additional revenue these insurer fees will add to Marsh's top and bottom lines, the spokesman said. "Over the next few weeks and months, we'll be ironing out the details of this new stream."

The agreement mandates that Marsh disclose to clients the amount of the insurer fees it will receive as well as the nature of the service for which it is compensated.

In the wake of a 2004 lawsuit leveled by then-Attorney General Eliot Spitzer, Marsh gave up about $850 million a year in high-margin market services revenues, including contingent commissions and a small amount of fees from insurers. It has since struggled to make that up.

News of the amended agreement came as Marsh posted a 1% rise in revenue to $2.3 billion for the first half of the year. For MMC, overall revenues increased 6.1% to $5.63 billion.

First-half operating income for MMC's risk and insurance services unit, which includes Marsh Inc., was down 5.7% to $384 million, while its margin dropped one percentage point from the year-earlier period to 13.4%. MMC attributed the unit's second-quarter profitability decline to the absence of market services revenue and greater-than-expected expenses supporting Marsh's long-term growth initiatives.

It's too early to say what impact the agreement will have on Marsh financially, analysts say.

"I think I'm going to wait before I declare it's a big deal," said Cliff Gallant, an analyst with Keefe, Bruyette & Woods Inc. in New York. "I don't think they're in a position right now to raise their prices on anybody," he said, noting Marsh's loss of business over the past few years. But "at this point, at least in the near future, I'm not expecting it to cause much of a boost to their earnings power."

"On the surface, it would seem that Marsh is just looking to collect some fees for certain services rendered to insurers," said Greg Dickerson, associate director of Fitch Ratings in New York. So while it doesn't appear that there is any impropriety, "it's really up to their clients" to decide, he said.

Terry Fleming, RIMS' director of external affairs, said the New York-based association "has no issue" with the agreement, which "specifies that contingent commissions are not included in the list of...fees paid by insurers."

"RIMS supports the economic growth of the broker community to the extent that the services provided are transparent with respect to fees and do not present a conflict of interest," said Mr. Fleming, who is director of the risk management division for Montgomery County, Md.