IRMI Update—Issue #99
An E-mail Newsletter for Risk and Insurance Professionals
ISSN: 1530-7948
October 26, 2004
In This Issue
Colleague,
Eliott Spitzer was wrong to launch an all-out assault against Marsh and broadly
label people in the insurance industry as unethical and immoral. I've read the
lawsuit several times, and, as far as I can tell, he identifies only one illegal
activity—bid rigging—that, so far, appears to have been committed by a handful
of people. Price fixing and bid rigging are unethical and illegal, and the people
who engaged in it should be punished.
However, contingent commissions are neither illegal nor unethical. They are
simply an additional type of commission paid to agents and brokers who place
a large volume of business with an insurer. It is a common and accepted practice
in the business world for the organizations that sell the largest volume of
a product to get the best deal from the supplier. This is one of the keys behind
Wal-Mart's success, for example.
Commercial lines insurance is not a commodity, you say, and brokers hold
themselves out as providing professional services. This is absolutely true in
my book as well, and contingent commission arrangements don't seem to fit with
this business philosophy. But that doesn't make them illegal or even unethical,
and it does make sense that those who place more volume with an insurer should
be able to get a better deal from the insurer.
My beef with Mr. Spitzer is his high-profile approach. Instead of going to
Marsh with his evidence and trying to work out a solution in everyone's best
interests, he launched a media-saturated, all-out legal assault intending to
do as much damage as possible. In his suit, he laments about Marsh's stockholders
being victims. Mr. Spitzer himself victimized them—as well as stockholders and
employees of virtually every other insurance organization—with his attack. If
he cared as much for his constituents as he does about being governor, surely
he could have found another approach for addressing the illegal activities he
purportedly found. If he wanted to take it on himself to change the industry
business practice of contingent commissions, he could have negotiated for it
with Marsh. He could always file the lawsuit if the negotiations broke down.
You may call me naive, but I believe that insurance professionals by and
large are honest and ethical. Sure, there will be bad apples in any company
or industry, and, if given too much authority and too little oversight, they
can make huge mistakes. But the vast majority tries to do the right thing for
their customers regardless of their compensation agreements.
With that said, if insurance agents/brokers want to be considered as professional
advisers to their clients, rather than sellers of a commodity, they need to
adjust their compensation programs accordingly. The industry should move to
fee-based compensation that is fully disclosed to clients for the commercial
lines sector. Business practices should support the image agents/brokers seek
to obtain.
Putting the bid rigging and price-fixing allegations aside, what do you think
about contingent commissions? Are they an unethical business practice, even
if fully disclosed to the client? Was Mr. Spitzer wrong in his approach, or
is this type of overhaul long overdue? If you are a risk manager, what actions
are you taking in light of this development? If you are an insurance professional,
do you think a fee-based system would be better? What are the disadvantages
of a fee-based system. [See reader responses.]
Have a great day.
Jack
Jack P. Gibson
President
IRMI
Keep your Auto Premiums Low: Develop, Document, and
Enforce Driver Standards—As a commercial agent, one of the most common
obstacles I face in presenting a competitive auto quotation is a company's list
of employee drivers with numerous and/or serious moving violations. My marching
orders in these cases are to confirm to the interested insurance company the
prospective insured's driver standards and relay the specifics on actions that
were taken with drivers having questionable records. Unfortunately, in many
instances, the insured has no defined driver standards and is not able to provide
information that will offer the comfort level needed for the underwriter to
price the policy competitively. In many of these cases, a quote will not be
offered at all.
There are many sources that suggest appropriate standards and tolerance levels
for "safe" company drivers. Here is one:
Drivers records will be obtained annually and drivers will be held to the
following:
-
One moving violation in the past 3-year period would require further
consideration and evaluation.
-
Two moving violations in the past 3-year period would be grounds to not
tender, or to withdraw driving privileges.
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One moving violation of significance (speeding in excess of 15 miles
per hour beyond the posted limit, for example) would be grounds to not tender
or to withdraw driving privileges.
The above may not be appropriate for every organization. The standards of
the program are less important than the fact that a program is in place and
is enforced.
In the current commercial underwriting atmosphere, it is a universal requirement
that employees driving insured vehicles have sound driving records. Yes, of
course, any list of driver records is bound to turn up a few violations. In
these cases, the "best" companies are expected to show evidence that they are
aware of their drivers' records, have a disciplinary system in place, and are
using it. These insureds generally have a number of carriers interested in insuring
them and are rewarded with the lowest premiums.
By: Joseph L. Pilato, CPCU
Maran Corporate Risk Associates
Marlton, NJ
www.mcrainsurance.com
Suggest a Risk Tip. Send us a practical tip (less than 300 words) for identifying and managing risks,
buying insurance, managing claims, or filling gaps in insurance coverages. Submit
your risk tip. We'll
acknowledge your contribution as we did for Joseph.
There are now 595 risk management and insurance articles on IRMI.com. Below
you'll find summaries of some recent additions with links to the articles.
Are you heading to the IRMI Construction Risk Conference in Orlando? If you
need to know what clothes to bring, what weather to expect, the hotel address
or phone number, or have other questions about the conference, drop by this FAQs page on IRMI.com for
answers.
IRMI's best-selling publication, The Additional
Insured Book, has been updated to reflect all the changes initiated by
ISO and the latest court decisions handed down in the 4 years since the last
edition was published. The new book addresses revised editions of a number of
additional insured endorsements widely used in connection with contracting operations.
These revised endorsements significantly reduce the protection available to
additional insured project owners and general contractors and will have a major
impact on insurance programs for construction projects throughout the United
States. In all, the fifth edition of the popular book includes more than 450
pages of additional insured information and strategies with more than 240 case
citations. For more information, visit the Products & Services section of IRMI.com.
In the IRMI Update 98 Message to the Editor,
Jack Gibson commented on the fine job claims adjusters have been doing faced
with the string of hurricanes and storms hitting the United States this season.
The following are some of the responses received.
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I had firsthand experience with two sides of the 1994 Northridge earthquake.
I live in Northridge, State Farm as the carrier on my then rented home did
an amazing job of helping us get out lives back in order. The adjusters
that came to our home were efficient and well organized. They knew how to
get the job done in a timely manner with out making my husband or I feel
at all rushed. When we found damage months later in our garage, another
adjuster was assigned and was doing an inspection in less than 48 hours
after it was reported. State Farm truly lived up to and exceeded my expectations.
I will be a loyal customer as long as they are writing HO insurance.
I work for 21st Century Insurance, prior to the earthquake HO insurance
was a profitable line for us while offering exceptional coverage to our
policyholders (at the time I was renting). Our headquarters building was
a mess, broken windows, desks, files, bookshelves & computers all topsy-turvy,
no running water or elevators in a fully occupied 11-story building.
A tent was erected in our parking lot, employees not needed in their
usual capacity or assisting in cleanup took first reports, homeowner and
auto claims. Everyone who spoke with a policyholder in need wanted to help
them, wanted to make a difference, to do what insurance is designed to do
put people back where they where before the loss occurred. We all worked
countless hours, often while our own homes stood in a shambles, because
it was our job and privilege to help our policyholders restore their lives.
Idealistic, maybe, but still my own feelings and observation of my fellow
employees.
—Marnee Downing, Corporate Training Unit Manager,
21st Century Insurance, Woodland Hills, CA
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I had a recent boat damage claim, unrelated to the hurricanes. My carrier
is Progressive and, although my dealings with them are primarily over the
Internet and by phone, I was quickly able to meet with an adjuster and get
the repairs started. I learned that this adjuster had just returned from
helping out in Florida and would be going back again soon. The point is
that this Progressive adjuster responded to a national emergency, while
still taking care of business at home. He was courteous, efficient, and
fair, and did not complain about all the catch-up work he must surely had
to do at his home office and in Florida. Thanks Kevin, and thanks Progressive.
—Rick Moscicki, Managing Principal, The Risk Consulting
Group, Jacksonville, TX
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Jack, Thanks for the kind words. As an adjuster of 30 plus years, I have
always said that I would never leave my area to do storm work. The storms
have hit my own house three time with the eye or eye wall being overhead
or within 5 miles. We have received some 300 assignments per adjuster since
the first storm, most of the assignments have been inspected and reported
upon (90% or better.
Please ask all individuals who read this to ask for phone numbers that
work and neighbors to give access to the property if the owners are not
available during the day. Also, please put back the street signs as they
are for people who do not live in the area rather than the locals (including
adjusters).
—Chris Eirich, CPCU, President, Quality Adjustments,
Winter Haven, FL
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