RIMS 2005: Spitzer's Legacy
April 2005
These are interesting times in this business
and the RIMS 2005 Annual Meeting, April 17–21 in Philadelphia, was a perfect
mirror for reflecting them. With a seeming consensus that the insurance market
pendulum has swung away from a hard market into the early stages of a soft market,
risk managers and their insurance providers wrestled with the implications of
Eliott Spitzer's startling findings of industry malfeasance and the possibility
of a life without TRIA. Of the two hot topics, broker compensation dominated.
by
Jack P. Gibson
IRMI
Risk managers attended workshops on contingency commissions and how to determine
whether to opt-in to the Marsh settlement agreement (and similar ones with other
brokers), while industry leaders, such as Willis Group Holdings' Chairman and
CEO Joe Plumeri, Aon's Pat Ryan, Marsh's Michael G. Cherkasky, and Lloyd's of
London's Chairman Lord Peter Levene outlined strategies and tactics for regaining
confidence and trust in the industry.
Plumeri Calls On the Industry to Abandon Contingent Commissions
In both his March 18
keynote address and the press conference following, Joe Plumeri said that
contingent commissions were inconsistent with the principle of client advocacy
and should be abolished throughout the industry.
"It doesn't matter whether the broker is global, regional, or local—based
in the U.S., London, or anywhere around the world," Mr. Plumeri said. "Carriers
shouldn't pay them. Brokers shouldn't accept them."
Instead, he said, brokers should replace the lost revenue from contingent
commssions by delivering creative solutions and bringing real value to clients.
Mr. Plumeri concluded his keynote speech by asking the entire industry—risk
managers, brokers, and insurers—to work together for positive change.
"Let this be our defining moment," Mr. Plumeri said, "a moment when—together—we
put comfortable tradition behind us and rise above the controversy surrounding
us."
Lloyd's Goes Middle of the Road
In an address
to the Philadelphia Club, also on March 18, Lloyd's of London Chairman Lord
Peter Levene did not go so far as Mr. Pulmeri, but did call for an elimination
of conflicts of interest and increased transparency.
"It's the issue of the broker receiving payment from both the client and
the insurance carrier," he said of the industry conflict of interest.
"Suddenly the question of who is working for whom is blurred and confusing.
But if we are to retain the confidence of the key player in all of this—the
customer—we need full disclosure and complete transparency about who is doing
what exactly, for whom, on what terms, and at precisely what cost," said Lord
Levene.
"In the insurance industry, the world's largest brokers have now taken decisive
action and abandoned the practice of contingent commissions. They have done
this not because contingent commissions are illegal, but because they cloud
things and create a situation where conflict of interest can occur. After all,
the broker is an agent of the policyholder, not of the insurance company."
"As for Lloyd's, our view is that we must have full, mandatory disclosure
of commissions, not just at Lloyd's, but globally, because this is a global
business. And the wider lesson is one which applies across all industry sectors.
Conflicts of interest will always occur, but we need to ensure that company
management acts in the best interest of shareholders."
Another Split Decision on Tuesday
RIMS day 2 saw a similar turn of events, beginning with the luncheon featuring
Marsh President and CEO Michael Cherkasky and Aon's Pat Ryan. Mr. Cherkasky
asserted that full disclosure and transparency does not cure all conflicts of
interest. He emphatically stated his beliefs that "contingent commissions are
a problem," the industry needs to move past them, and the market will make this
happen over time.
Mr. Ryan, on the other hand, refused to call for all brokers to reject contingency
commissions.
"You, the buyer, have to make the decision in choosing brokers with or without
contingency commissions. But you, the buyer, should also force transparency
at all levels," he said.
Mr. Ryan also confirmed that Aon's plans to sell its wholesale operation
were driven by recent events.1 He admitted that
the ownership of wholesale brokers created the potential for conflicts of interest,
but asserted that they are remedied by full disclosure. Essentially, it became
a value decision: the operation is worth more to an outside party than the retail
broker for two reasons:
- Most Aon competitors will not use Aon's wholesale facility.
- Aon's own employees would hesitate to use it for fear of the appearance
of a conflict of interest
One thing Mr. Ryan and Mr. Cherkasky did agree on is the need for full disclosure
and transparency of all income received by the broker, irrespective of the source.
They both assured the audience—perhaps 2,000 risk managers—that all income received
will be disclosed in the future.
At the luncheon and a subsequent press conference, RIMS First Vice President
Ellen Vinck stated that she and many of her fellow risk managers believe that
"there should be one source of payment to brokers and that source should be
the customer." She called on risk managers to "get out there and make your feelings
known in the marketplace."
RIMS' position on contingency commissions has evolved over time. Its first
position in the 1990s was that brokers should disclose all sources of income
upon request by their customers. In 2004 its official position became that brokers
should disclose all income without being asked. Its latest position goes a step
further, indicating that RIMS would support the elimination of contingency commissions.
However, RIMS has not gone so far as to call for their elimination.
RIMS' leadership justified this position by saying that contingency commissions
are not illegal and it isn't the Society's purpose to try to impose business
models on the insurance industry. Instead, its purpose is to serve the needs
of a diverse membership by informing and educating them on these matters. Ms.
Vinck believes there should be a single system used throughout the brokerage
community and that having some brokers accept contingency commissions while
others reject them will be unworkable in the long run.
"The industry should put forth a model that takes care of all the issues,"
she said.
Meanwhile, two of the agent and broker associations issued dueling press
releases on day 2, responding to Mr. Plumeri's keynote speech. The
National Association of Professional Insurance Agents characterized his
call for the elimination of contingency commissions industry wide as "hypocritical"
and "dubious," reaffirming its position of "support of contingent commissions
being a part of the compensation received by Main Street professional insurance
agents."
In response, Ken A. Crerar, president of
The Council of Insurance Agents & Brokers criticized PIA's response, which
he characterized as "inflammatory."
"PIA is missing the point entirely," he said. "Full and complete compensation
transparency by insurance producers—clients deserve it and many are demanding
it. The regulatory inquisition of recent months is leading us inexorably to
that industry standard. Yet PIA and others seem to think that transparency is
good only for some commercial insurance transactions. The sooner industry groups
stop finger-pointing and disparaging one another and support a standard for
compensation disclosure—such as the
NAIC model law—the more trust we'll earn from consumers, and we can all
move on. We have nothing to hide."
Where This Is Heading
My opinion, which I first expressed in
IRMI Update on February 22, remains the same: the marketplace will force
the elimination of contingent commissions if the regulators don't do it first
(and I don't think they will). People and organizations can debate this all
they want. However, in a free market, the customer votes with his or her feet.
Regulators and risk managers are demanding more disclosure of broker income,
and the largest brokers will develop sophisticated systems for complying. Of
course, they have already given up contingency commissions. These brokers will
use their new compensation approaches and reporting systems as competitive tools
against those who do not adopt them. Mssrs. Plumeri and Cherkasky set the stage
for this at RIMS, and they are not likely to drop the issue now. Mr. Plumeri
also confirmed that Willis has already conducted training sessions on how to
communicate with clients and prospects about broker income.
The fact of the matter is that taking contingent commissions presents an
apparent conflict of interest even when the broker does in all cases put the
client's interest first. How does one compete over time with a growing cacophony
of competitors screaming that your system presents conflicts of interest that
are not in the best interest of your clients? When those who accept contingency
commissions start losing customers to those who do not, they will change their
systems. The second-tier brokers will feel this pressure first as they compete
with Aon, Marsh, Willis, and Gallagher. When they change their systems, they
will pressure the brokers below them, and so on. It may be a slow process, but
I think it will happen.
Will it be pushed all the way down to those writing mom and pop businesses
and personal lines? No one knows. While it seems logical that insurers may not
want to maintain different compensation schemes for different agent/broker relationships
in the long run, they certainly do so now.
And that brings us to agents. Many of those engaged in the debate over contingent
commissions, such as the leadership of RIMS and the PIA, are distinguishing
between agents and brokers, implying (or stating) that totally different approaches
are appropriate. After all, an agent legally represents the insurer, and a broker
legally represents the customer. Perhaps the situation will ultimately settle
with different systems, but don't count on it.
In the past decade or so, the distinctions between agents and brokers have
been greatly blurred. For example, some of the model legislation penned by the
NAIC attempts to eliminate the distinction, lumping agents and brokers into
the category of "producers." At least one state, Texas, does not allow the sale
of insurance by brokers, and the "brokers" of the world operate there as agents.
Likewise it is very common—and understandable—for agents to advertise that they
represent their customers' interests first (even though they may be contractually
obliged to do otherwise). The fact is agents and brokers represent the same
insurers in the marketplace and compete with each other. At least in the commercial
lines arena, it seems unlikely that two different schemes will survive for them.
The bottom line to all this is that compensation structure and ability to
clearly communicate the value added to the equation will likely become an increasingly
important component of the competition between agents and brokers in the future.
Bob Dylan summed up this situation quite nicely in his 1964 song, "The Times
They Are A Changin'":
For he that gets hurt
Will be he who has stalled
There's a battle outside
And it is ragin'.
It'll soon shake your windows
And rattle your walls
For the times they are a-changin'.
Make sure you are prepared for the changes.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
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