IRMI Update—Issue #100
An E-mail Newsletter for Risk and Insurance Professionals
ISSN: 1530-7948
November 9, 2004
In This Issue
Colleague,
It was no surprise that my last editorial—on Spitzer's action against Marsh—drew
a huge reader response. The readership was split as to whether he went too far
and as to whether or not contingency commissions are inherently a bad business
practice. You can read them below.
Regardless of what we think, his discovery of illegal behavior is an embarrassment
to the insurance industry. And his spotlight on contingency commissions, market
service agreements, or whatever you wish to call them as the enabler of this
behavior will forever change the industry.
If there was ever a time for the insurance industry to focus on ethics and
integrity, now is that time. And I don't mean just giving it lip service. We
need a top-to-bottom commitment to ethics and integrity in this industry that
will not tolerate individuals within an organization cheating customers.
Insurance organizations also need to eliminate any business practices that
may even appear not to be in the best interest of the customer. That is why
contingency commissions must go, and full disclosure of all compensation is
a necessity.
Risk managers should think long and hard about doing business with an insurance
agency, brokerage, or carrier that does not have a written code of ethics which
clearly puts the buyer first. Agents and brokers should seriously consider whether
they want to place insurance with carriers who do not have a demonstrated commitment
to a written code of ethics. Insurers should just as carefully study the ethics
of the agents or brokers who represent them. And frankly, agents, brokers, and
insurers should think long and hard about doing business with a risk manager
who doesn't demonstrate a commitment to ethical business practices.
No matter which side of the business on which you work, ask all your business
partners for a copy of their ethics code and inquire as to how they motivate
their employees to abide by it. If your organization doesn't have a written
code of ethics, it is time to get out your pen and start writing.
Does your organization have a written code of ethics? What are the key elements
of such a code? How should a company go about obtaining a true commitment to
ethics and integrity from everyone in the firm? How can you tell if a service
provider's firm is committed to its code? View
reader responses.
This it the 100th issue of IRMI Update, and we just surpassed 600 articles
on the IRMI Web site. Thank you for your support by subscribing to IRMI Update,
in recommending it to your business associates, and in responding to my editorials.
We're having a lot of fun, and I look forward to the next 100 issues.
Have a great day.
Jack
Jack P. Gibson
President
IRMI
Read the Contract—This may seem self-evident,
but in my business—consulting engineering—you'd be surprised how often folks
don't read contracts or terms and conditions, especially if they are lengthy.
Know what you're signing. Know what you're promising and what's being promised
to you. I can tell you from personal experience that if you read the verbose
language you will find that it is often unfairly weighed toward the other party
(often, your client). Negotiate to change the terms so they are equitable and
appropriately related to the tasks over which you have control. This will go
a long way toward mitigating problems that inevitably arise. When it comes to
business, you can't afford not to read between the lines.
By: Jennifer V. Morrison
President and Director of Business Management
Sterling Engineering Co., Inc.
Sturbridge, MA
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 Jennifer.
There are now 601 risk management and insurance articles on IRMI.com. Below
you'll find summaries of some recent additions with links to the articles.
We have recently updated the IRMI reference library to include the latest
issues of our newsletters, The Risk Report, Captive Insurance Company Reports, and Strategic RM, as well as supplements to
a number of the reference manuals. See a summary of all the new stuff with direct
links into the publications.
For IRMI
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In the meantime, learn more about the conference, how to become a sponsor, and
future dates and locations at the Conference section of IRMI.com.
In IRMI Update 99, Jack Gibson discussed the Eliot
Spitzer lawsuit against Marsh and whether contingent commissions are inherently
illegal or unethical. In essence, he opined that while Spitzer was right to
pursue those who engaged in illegal activities, he was going overboard in his
suit against Marsh and condemnation of the entire industry as being corrupt.
Many points were raised, and many responses received. Below are some of those
responses.
-
I cannot agree with the editor's message more. Bid rigging is not a common
practice in our industry and shame on those greedy few who have compromised
our industry's credibility. The independent agency system has its share
of obstacles to contend with: the market cycles, company volume commitments,
carriers lowering our commissions, and now we have to do our own quoting
and policy issuances. Contingent commissions can make or break many small
to medium-size agencies, and there is nothing wrong with getting additional
compensation for selling a high volume and being profitable for a carrier.
Spitzer's attack should be directed on those individuals that broke the
rules not an attack on our industry.
—Ben Minasola, Owner, Hampshire Insurance Agency,
Addison, IL
-
I completely disagree with your opinion and position regarding the Spitzer
probe. First, Spitzer's high profile approach is exactly what is needed.
My experience is that respective departments of insurance and the state
insurance commissioner are (were) ill-equipped, and unethical themselves
(see Louisiana experience—they have had approximately four or five insurance
commissioners indicted since 1989; Morales of Texas; North Carolina, Oklahoma,
etc.). Insurance commissioners, with few exceptions, serve the special interests
of the insurance companies and brokers such as Marsh. The majority of insurance
commissioners come from and move to the insurance companies they are appointed
to regulate. Frankly, they have no guts, and the system breeds conflict
of interest.
Secondly, why should an insurance broker profit directly from an insured's
loss experience? If the insured's experience is good and favorable, the
insurance company should be paying the insured, not the broker for providing
a profitable risk. Brokers have nothing to do with the success or failure
of a risk. Granted they promote and hold themselves out to be all things
to all clients, from "independent" insurance brokerage, to loss control,
to claims consulting, to risk management, and so on, and so forth. In reality
the broker is concerned with one thing only—their profit.
Thirdly, you cannot possibly convince me that in the case of Marsh, Aon,
Willis, ACE, and others presently being investigated, that "a few bad apples"
are the cause of the bid-rigging. There is no doubt that internally these
companies from the top down were and are aware of the practice. The simple
fact that insurance companies played along is indication of the accepted
practice top down. Further indicative of the broker arrogance is suggesting
the a janitor attend a meeting just to have a body present. Disgusting.
The only manner in which a broker will be independent of insurance carriers
is when the fee is paid directly to the broker by the insured. As long as
brokerage firms are paid fees by insureds and collect commissions of any
kind from insurance companies, there will always be room for corruption,
price-fixing, conflict of interest, and other behind-the-scenes deals.
In closing, contingent commissions in my opinion are unethical, period.
Disclosure is a moot point in that, as stated above, why should a broker
benefit from placing business with an insurance company? It simply opens
the door for abuse. If anyone should be rewarded for placing business with
an insurance company, it should be the insured, and if anyone should benefit
from favorable loss experience, it should be the insured and consumer in
the form of reduced rates and or premium credits upon renewal.
A fee based system would be better. Plain and simply, it brings the broker
into being independent from insurance companies and the temptation of greed
without disclosure.
Last but not least, states regulating insurance is a joke. They do not
have the budget, manpower, skill, or inclination to REALLY regulate insurance
companies, insurance brokers, and service companies to the industry. McCarran-Ferguson
is a dinosaur and it's time to eliminate the protection of M-F. While I
am against federal intervention and regulation in most instances, I would
support federal regulatory oversight and enforcement over the states. The
states have had decades to get it right and never have.
—Olie Jolstad, Vice President, Robert Hughes Associates,
Inc., Richardson, TX
-
In the less rarified atmosphere of an agent (opposed to national broker),
pure volume contingent commissions are rare. "Profit sharing" agreements
are the norm. A volume is required before profit is calculated and shared.
The former, given the pressure cooker atmosphere, is much more likely to
lead to unethical behavior. The latter, in my 42 years of experience, is
just "there," to be enjoyed or regretted when the results are final.
—Tom Drawert, Executive Vice President, HCDT Insurance,
San Antonio, TX
-
As an insurance professional of sorts and an amused spectator of the
business scene for many years, I will respond to your request for comments
about the current scandal roiling the industry today. Jack, I think you
have properly skewered Mr. Spitzer for excessive grandstanding, but his
probe and accusations are not only appropriate, but long overdue.
It has always seemed strange to me that professionals of all types are
so insensitive to their own prejudices and conflicts of interest. I once
wrote an entire article on this subject, commenting on how doctors see nothing
wrong with owning pharmacies, accountants mingle consulting with auditing,
lawyers promote litigation, etc., through almost all the professions.
Insurance brokers supposedly represent the buyer of insurance. They can
do this if compensated by the buyer. If compensated by another source, they
will favor that source, no matter how much they fail to recognize it. If
compensation is a percent of premiums, that will bend them toward higher
premiums. If it comes from steering business to an insurer that offers contingent
commissions, that turns them toward that insurer.
Even the most upright individual is influenced by self-interest. Supreme
Court justices recuse themselves from cases in which they may have any hint
of possible prejudice. Prejudice is a human condition to which we are all
subject.
The only proper way to compensate an insurance broker is a fee from the
client. They cannot accept commissions on insurance and perform in the client's
interest. Why that simple fact—and it is a fact, not an opinion—is not widely
understood is a source of continual wonderment to me.
—David Warren, Retired Risk Management Consultant,
Orinda, CA
-
There is a difference in the MPA contracts and the typical profit sharing
contingency contract that most companies provide their independent agents.
The MPA compensates for large growth, and can be misused according to the
suit. Its disclosure should be mandatory as it is unconditional added income.
The typical profit sharing agreement that most independent agency companies
provide are not automatic payouts. They are based on the job we do as front
line underwriters. If we select correctly, a profit is made, and we get
a small reward. If we select wrong, we get nothing, and if it happens several
years in a row we lose our contract.
Agents have an underwriting and fiduciary responsibility to the company.
If we are paid commissions only, we could ignore underwriting and then insurance
would be a commodity with no service needed. This way we are rewarded for
a job well done, not just for delivering a sale.
We run our agency on a budget that excludes this contingent income. When
we do get it, it allows us to make capital improvements to our operation,
and finance additional personnel for service improvements. Do away with
them, and standard commissions will have to increase or service be reduced.
That is not in the customer's best interest and a miscarriage of justice.
—Richard Heckle, Chairman, Dean, Heckle & Hill, Inc.,
Matthews, NC
-
I think the abuses and fraudulent practices uncovered to date by Mr.
Spitzer are more widespread and common than one would like to believe. This
is just the tip of the iceberg. If the big boys are doing it, you can be
sure large regional brokers and large local brokers are involved and doing
it as well.
I've been in the business over 40 years and have always believed the
commission factor in the sale of insurance presented a real or potential
conflict of interest. Without question, a fee based system for brokers is
superior to the commission system. Why shouldn't the buyer of insurance
know exactly what he/she is paying their broker? Why do brokers not want
their clients to know what they make in commissions?
Contingent commissions present another potential conflict of interest
for brokers. They should be done away with and in return insurance companies
should offer profit sharing to insureds with no losses or profitable loss
ratios.
Mr. Spitzer is "right on" with his investigations. The ongoing abuse
and rip-off by insurance carriers and unethical practices by brokers against
the naive, uneducated insurance buying public should finally be curbed and
diminished. Shame on those risk managers who aren't aware of how carriers/brokers
operate.
It is important that every 3 to 5 years, firms of size, have their insurance
program put to bid by an impartial, objective, non-selling insurance professional.
—David Skolsky, Corporate P/C Consultant, Insurance
Analysts & Consultants, Atlanta
-
As an insurance broker, being in favor of contingent commissions could
appear to be self-serving. However, in my experience, the existence of a
"profit-sharing agreement" has never had any bearing on what company gets
the business. In this competitive marketplace, there are already so many
factors to compare including policy type, form, exclusions, conditions,
limits, language, coverage definitions, and premiums quoted, that contingency
arrangements have never been a factor. On the other hand, these agreements
have always encouraged honest representation of client exposures to loss
working in partnership with insurance underwriters. The purpose of sharing
in the profitable results has more to do with effectively selecting and
placing business that is profitable than it does with ethics. In my mind,
this practice is as unethical as capitalism itself.
It should not matter whether or not contingent commissions are fully
disclosed to the client. As a consumer, I have always sought the best deal—and
that could include any number of factors including price—but profitability
has never been an issue for me personally. Consider automobile dealerships
for example—what deals they have with their manufacturers to earn extra
income based on volume sold has no impact on my decision to buy from one
dealer over the next.
The dishonest bid-rigging practices aside, Mr. Spitzer has clearly taken
the wrong approach on this.
As an insurance professional, I have always viewed the contingency commission
system as a fair way to compensate agents and brokers for their work—and
also to reward the industry for effective risk selection. I think a fee-based
system may initially be difficult to implement—especially for small agents
and brokers. Making the determination of what service fee level will both
be competitive and adequate enough to compensate brokers for their services
is the first challenge. Having the capability and capacity to provide value-added
services is another matter. The large brokers will have the competitive
advantage in a fee-based system, simply by virtue of scale economies and
the service resources they can make available without any new additional
investments.
In the long run, a service fee solution has more advantages than disadvantages
to the commission based system for the following simple reasons:
There will always be dishonest and unethical people who will find ways
to cheat their clients and their partners in any system. In the insurance
industry, the practice of paying commissions and contingent commissions
has always worked well.
Any system—insurance, government, you name it—will always suffer when
there are cheaters, liars, and thieves. I am grateful for Eliot Spitzer's
speedy persecution of all the cheaters, liars, and thieves.
—Philip Eifert, Kaye Insurance Associates, Inc.,
Westport, CT
-
Jack, I agree wholeheartedly with you. As a former employee of Marsh
& McLennan, Inc. (the old company, before the mergers and acquisitions),
I was whacked twice with Spitzer's grandstanding, once with the Putnam fiasco
and now with the Marsh bid rigging scandal. With a crack of Spitzer's whip,
my retirement & my children's college funds have dwindled to a mere pittance.
How will I ever recover 24 years worth of contributions? What are the addresses
for forwarding my college tuition bills to the Greenbergs or to Spitzer?
Now that Jeff Greenberg is out, how much will his golden parachute be? I
surely won't have the same cushion, nor will my former colleagues.
—Barbara C. Walsh, Bond Claims Examiner, Selective
Insurance Company of America, Branchville, NJ
-
If proven, these alleged practices will take the insurance
industry to a place where it has rarely gone before—into the world of state
antitrust regulation.
Having served as the first Chief of the Antitrust & Consumer Protection
Division for the Office of the Texas Attorney General (1973-1975), I can
assure you that many, if not all of our 50 states will undertake intense
investigations making full use of subpoenas; civil investigative demands;
administrative enforcement actions; civil lawsuits and criminal prosecutions.
One does not have to be a Nostradamus to see this coming. But wait—there's
more!
In the wake of these government actions will come the private lawsuits
and class actions alleging breach of fiduciary duty based primarily on conflict
of interest and failure to disclose material facts. Defending these lawsuits
will be difficult due to the shift in the burden of proof to the defendant
to show that all matters relating to the transaction were fair to the client
or policyholder.
Although the government enforcement actions will no doubt launch new
political careers, it is these lawsuits that will redistribute the profits
and commissions obtained through the discredited practices. In the end,
however, it may be that the advent of 50 separate state actions coupled
with the orgy of private class actions will make federal regulation of the
insurance industry a reality. The really interesting thing to watch will
be the NAIC's reaction as these events unfold.
—Joe K. Longley, Partner, Longley & Maxwell, LLP,
Austin, Texas
-
While I appreciate Jack's view of the situation, my problem with this
type of situation is more broad. Regardless of how Spitzer addressed the
situation of illegal bid-rigging, the issue of ethical behavior in corporate
society has been brought to the forefront in 2002 with Enron, Worldcom,
Quest, and many more that we'll never know about. How something so clearly
unethical was allowed to start, let alone continue after 2002, blows me
away. It either shows extreme arrogance or nativity. While rarely is fraud
or collusion a company-wide issue, the culture that pervaded [these companies]
certainly contributed to the situation they are in today.
On contingent commissions, the biggest issue with them is that they can
be used by innocent salesfolk to sell more insurance from one company, whatever
the bid is, so they can hit their number and get their bonus. Salespeople
are driven by incentive programs, and if they are not smartly developed,
unethical behavior rises to the surface. This is an inherently bad incentive
system that can only push folks into the gray, and sometimes black, when
it comes to ethical decision making. Contingent commissions might not be
illegal, but they are the stuff that breeds unethical behavior when the
numbers have to be met.
And senior and executive corporate folk wonder why there's more regulation,
not less. I feel for the hard workers at Marsh who will get laid-off because
of this, and have lost their 401K nest egg. I hope the company culture can
change, that the criminals will be prosecuted to the fullest, and I really
hope their risk manager has the proper coverage for all the lawsuits on
the way.
Also, when it comes to stockholder fiduciary duty, even remotely pointing
a finger at Spitzer makes little sense. Marsh has a board of directors,
competent management and oversight, and had every duty to not only know
about this, but to stop it and change the culture. Unfortunately they decided
to do just that only after they were caught (as most companies do). The
blame for the company's troubles has nothing to do with Spitzer. People
couldn't have forgotten about Enron and Arthur Andersen already...
Getting away from commission-based purchasing of insurance is something
that many large companies already do through a fixed price BSA. The best
risk managers force this on their broker, and both sides usually agree to
a fair price for service provided. As a broker, this also allows them to
discuss possible add-ons, like consulting services, loss control, ERM, etc.
Since this is already being used, there is already another business model
that brokers and buyers use that is not dependent on commissions.
—Steve Phillips, Director, Treasury Operations, Belo
Corp., Dallas
-
Eliott Spitzer has politicized his "investigation" into the insurance
industry simply to continue his quest for the governorship of New York.
Clearly, illegal activity must be dealt with, whether in the insurance industry
or elsewhere. Spitzer's approach here as in the mutual fund probe is over
the top but guaranteed to attract the focus of the New York media.
Fees, in my experience, are appropriate if the purchaser of insurance
and/or risk management services is sophisticated enough to grasp that he/she
should not view these as a commodity buy. Sadly, even with larger organizations,
this is often not the case. It remains the case that many organizations
accord to their legal and accounting service providers higher credibility
than those of us laboring in the vineyards of risk management consulting.
Spitzer's investigative approach has the effect of tarring the entire
industry and serves to perpetuate this problem.
—Dennis Wales, Principal, Pinnacle Risk & Insurance
Services, Arlington, TX
-
... Should we have fees? Maybe, but let's work it out for the small agency/producer
as well as the big one. Big is not always the best. If you have a $100,000
premium and the commission is 15 percent on P&C, most businesses say nothing.
If they see a $15,000 fee on the proposal, their wheels will come off. The
business does not think about the costs behind the scene for the agent,
only the $15,000 as being excessive. They think the agent is getting it
all. Jack, for those of us who are professionals and have continued our
education with CPCU, ARM, CLU, ChFC, etc., we know what is important—do
for our client what we would do for ourselves in the same situation. I have
lived by that for 35 years and it has served me well. Maybe corporate folks
should think along the same line.
—Bobby Nordheim, CLU, ChFC, Nordheim Insurance, Huntington
Beach, CA
-
Thank you for your editorial. I believe it is right on. For larger agent/brokers,
fees work well. For smaller agents with smaller clients, commissions are
much easier.
As to the value of the agreement, it aligns the goals of the company
with the agent. The agent needs to reach some size for efficiency purposes,
and produce profitable business.
Our risk manager clients are asking for information on our contingent
agreements. If the client had a loss that was charged against the computation
and the agency received less contingent income because of that loss, do
we show negative income for that client, and maybe send them an invoice
for what they cost us?
—Douglas Sanford, Co-CEO, Sanford Insurance Agency,
Lubbock, TX
-
Jack, I can't disagree with your assessment of Spitzer's assault on Marsh
except for your take on the contingent commissions. You are correct in stating
that they are not illegal, but when a broker holds itself out as a representative
of the insured and then places the insurance with an insurer that pays it
the highest contingent commission without regard to the best terms, conditions,
or premiums for the insured, then it is committing fraud against its insureds.
I guess in order to eliminate the temptation for a broker to place its own
self-interest before that of its clients contingent commissions should be
made illegal. It is truly a shame that ethical behavior needs to be codified
in law.
—Robert Duty, Managing Partner, Cardinal Risk Management
Alternatives, Inc., Dallas
-
Contingent commissions are a very important part of revenue for a number
of brokers and agents. Because of this, they can create internal pressure
on a broker/agent to place business with the company that will add the additional
revenue. With that said, it is very important that risk managers and insurance
buyers be aware that these exist and request full disclosure of these from
their agent/broker. Larger insurance buyers should compensate their agent/broker
on a fee for service basis as defined in their written agreement.
While I don't feel contingent commissions are illegal, I do feel they
can be abused by those who are not as ethical as others. This is just another
reason why a savvy insurance buyer stays closely involved in their insurance
program and researches all options available to their program. Commissions
are generally in the 10 percent range on coverages, with some lines yielding
higher commissions and others, such as workers compensation, paying lower
commissions. This should be taken into consideration when formulating the
fee a risk manager or insurance buyer is willing to pay.
—Bill Horner, VP Risk Management/Broker, Bowen, Miclette
& Britt, Inc., Houston
-
While I agree with your assessment of Mr. Spitzer's crusade against the
insurance industry as being politically motivated and his target so broad
as to insinuate that all of us in the insurance industry bear watching,
I for one welcome this shake-up.
Our business practices have become jaded by those who would make it all
about the almighty dollar as opposed to all about the client's needs.
I say, let's put our collective positive foot forward and show the public
that as an industry, we are the ones who keep businesses and individuals
on an even keel; help the businesses plan for every contingency and the
solitary individual recover from hurricane damage, the death of a partner,
etc.
Our industry should shake Mr. Spitzer's hand and say, thanks for keeping
us honest and on the right track, but be careful not to alienate us inasmuch
as we are an important part of our client's everyday life and that we, collectively
represent nearly all of the votes you may try to garner in an election.
And to the boards of AIG, Marsh and other carriers who blatantly overlook
the issues in the pursuit of profits, I say ... pay attention and act accordingly.
There are traitors in your midst.
—Charles Barnes, Executive Vice President, Ten Eyck
Group, Albany, NY
-
I tend to agree that contingent commissions per se are not illegal or
unethical. I also agree that Mr. Spitzer's approach to the contingency commission
issue was done in a way to bring more attention to himself than to correct
a supposed industry problem. Having said all of this, however, I do feel
that there is a potential conflict of interest when a producer is paid excess
commission solely on the basis of his premium volume with an insurance company.
The balance to this over the years has been the ability to offset pure production
with an offset for losses.
When contingent commissions are paid strictly for production, insurance
does become a commodity and many producers will place business without fair
consideration of what is best for the insurance buyer. I suspect that it
is these type arrangements which are more problematic.
It is unfortunate that our industry is impacted by those who would apparently
rig bids, as has been asserted by Mr. Spitzer. Our industry typically is
awash with cash and also those who will do anything to get it. If Mr. Spitzer's
actions reduce these sort of activities, it is a better landscape for all.
Finally, the idea of federal regulation is again on the table. This needs
fair consideration because those of us who routinely operate our businesses
across state lines continue to run into needless obstacles established by
state run insurance departments.
—James Edwards, President, Bailey Special Risks Inc.,
Hendersonville, TN
-
Of course there is nothing wrong with contingent commissions, per se.
The only violation would be placing business with a carrier for the benefit
of a broker at the insured's expense.
Typically, these carrier relationships help clients, rather than harm
them, since the client benefits from a stronger relationship that an agent
has with a carrier to negotiate coverage and price. Ironically, this week
alone, two new carriers have approached us with contingent arrangements.
We did not seek them out—they sought us out to increase their distribution
of their product.
I agree, Spitzer took this a little too far since every industry has
incentives to improve the distribution of its products.
—Ray Klembith, Vice President, Insurance Associates
of Northern California, Walnut Creek, CA
-
I am in agreement with Jack's assessment. If the bid rigging charges
are true, then there should be ramifications for their actions, and they
should suffer these. The problem I have with Mr. Spitzer is that he is painting
the entire industry as unethical and immoral. These charges should have
been negotiated directly with the parties involved, instead of this political
stunt. On the subject of contingent commissions, we have had these agreements,
and they are based the profitability of the book of business. It is very
good incentive for us to write good business. Our agreements have never
been based on volume. The problem I see is that once the term "contingent
commissions" becomes a political issue in the media that truly doesn't understand
our business, the true facts will never be explained to the public that
doesn't trust the insurance industry anyway.
—Billy Timmermann, Agent/Principal, Timmermann Insurance
Service, Inc., Winston-Salem, NC
-
When you boil the actions down, it appears to me that it is the offering
of money for consideration of a business opportunity. I cannot think of
any benefit to the ultimate customer. I believe the practice is actionable
in the United States and Western European judicial systems.
—Bob Southward, University Capital Contracts Officer,
Cornell University, Ithaca, NY
-
"He could have found another approach." One of the best observations
in your editorial. I think we as insurance professionals could turn the
attack back to the way Mr. Spitzer has run his campaign. Are we to take
his actions as a reflection of how he would perform in office? If anyone
should be held to a higher standard it would be those "we" put in office.
His actions are neither ethical nor good business for the state or the country!
I have not heard in all of the arguments on contingent commissions the
fact that many are tied to loss ratios. The market service agreements are
mainly at issue here, but again I would guess that most of the contingent
agreements in place across the nation have a loss ratio component.
It is unfortunate that the damage is done. The insurance industry has
been on the mend over the past 5 years. Just as carrier closures have slowed
and market conditions equalized, we have the next punch to keep insurance
rates high. Our industry needs leaders that work to keep a healthy business
environment. Finding some isolated incident and making it a larger issue
will only damage the industry which ultimately will increase costs to the
end consumer.
—Harold Russell, Owner, HRA, Cochecton, NY
-
Eliot Spitzer is a political hack. It has been best said in a WSJ article
by Alan Reynolds this past Friday who takes Spitzer to task for stepping
out of bounds. It makes you wonder why Spiro who is NYS Insurance Commissioner
has been silent throughout this entire situation. Spitzer has no grasp of
this situation; on the other hand Jeff Greenberg might have played his cards
differently.
—Peter Polstein, Consultant, Somers, NY
-
The analysis of the Marsh profit-sharing agreement scandal in today's
Update is flawed. It is based on the view that 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." However, brokers
are not, and do not hold themselves out to be, vendors who retail insurers'
products. That's what captive AGENTS do. An independent broker is supposed
to advise and represent the insured. The dishonesty, price-fixing, and bid-rigging
described in Spitzer's complaint are far more damaging and unethical than
you seem to think they are.
Having said that, let me also say you're completely right about Spitzer's
being a press-hungry glory-hound. The man clearly wants to be the governor
or a U.S. senator. Any benefit he confers on the public while furthering
his own career will be purely fortuitous.
—Tom Bower, Law Office of Thomas M. Bower, Briarcliff
Manor, NY
-
I agree with you that the case is more a media stunt than any public
good. Unfortunately, brokers have failed to gain the same kind of professional
reputation as that of a doctor or lawyer. That would hamper them from demanding
the true price for the service they would perform for the client. If we
truly ask ourselves whether a client would willingly pay equivalent fees
as that of a normal brokerage, the answer is no. Lack of esteem for a professional
broker and competitive environment would ensure that the brokerage would
be at a level where servicing can be done at a loss. Any broker who is worth
his salt has to invest heavily on information systems, knowledge acquisition
activities which are not very visible to the clients. Therefore, there is
a general feeling that brokers earn easy money. Not all do.
Fee-based systems can only result in broker appointments to be done on
pricing and would result in price wars that may not be conducive for the
overall growth of the industry. But all signals point in that direction
and we may face a very painful restructuring of this industry in the near
future. This high profile case will also manage to damage the general reputation
of the industry, and all the players would feel the heat. Ironically, all
the players in an industry where trust is the stock in trade would be mistrusted.
—Raveendran Iyengar, Managing Director, ALEgION Insurance
Services Ltd., Chennai-Tamilnadu, India
-
Let's look at what would happen without contingent commissions for placing
high volume business with a specific carrier. There would be higher fees
charged, higher commissions charged, and therefore higher premiums to the
customer. So long as the broker can prove that they did their due diligence
in obtaining the broadest coverage at the best price, then they are doing
the job we are paying them to do!
As noted in your e-mail, there will always be "bad apples" in every industry.
Companies must do there best to assure that ethical and professional behavior
are maintained at every level. Had Marsh been given the opportunity to deal
with this issue internally, I believe they would have taken a very harsh
view of this type of behavior and dealt with it immediately. Over the last
20 years, I have dealt with many Marsh offices and never once felt that
there were any unethical dealings going on. Overall, Marsh does a great
job.
—Gail Templeton, Risk Manager—Americas, Cadbury Schweppes
-
This conduct is much more than a mistake. It involves issues that need
public attention.
—David Chambers, Risk Manager, Richland County, Columbia,
SC
-
Spitzer is an interesting creature—a blue-blood with a prep-school education,
a trust fund, and a summer home AND a humble public servant who claims to
be sweating it out for the common investor. He punishes his corporate victims
by deflating their stock price, not by prosecuting them with prison sentences.
The markets give him his power by reacting to his investigations. When the
markets lose interest, which I suspect will be soon, he'll be swinging a
whiffle bat instead of a mighty club. That day can't come soon enough.
Reforms? The investment banking and mutual fund industries have sure
been revolutionized, haven't they? That Spitzer thinks he needs to "protect"
an astute group of buyers (risk managers) from a sophisticated group of
sellers (brokers) tells you that he's either got an unquenchable lust for
PR or he actually thinks himself that much smarter and self-righteous than
an entire industry of very intelligent people. The system that's in place,
with contingent commissions, works, and most participants know how it works.
A client's trust is the easiest thing in the world to abuse. Mr. Spitzer
cannot prevent this abuse, nor can he devise a solution that works better
than a client moving their business elsewhere. Individual people making
individual decisions, that's the American Way. We're all adults here, aren't
we?
—Thomas Bobrowski, Producer, Rothschild Agency, Merrillville,
IN
-
I agree with the "fees" on commercial business, but why stop there? Why
not on personal lines, warranties, etc.—make everything transparent.
—Peter Hindmarch-Watson, President, HW Asset Management
Inc., Vancouver, BC
-
First, I agree that most of us in this business are honest, ethical,
and generally do the best we can for our clients. That keeps us in this
game for the long run. As for the contingent commission issue ... in my
opinion, contingent commissions are best used when there is a profit requirement
in addition to a production or volume requirement. The profit requirement
assures that business written does in fact benefit all parties.
—Bob Ostgulen, Marketing Mgr., Vaaler Insurance,
Inc., Grand Forks, ND
-
I strongly agree with your comments regarding Mr. Spitzer's charges and
have even used the Wal-Mart example myself in trying to explain the situation
to those outside the field who tend to jump on the bandwagon and take Mr.
Spitzer's comments at "face-value." I believe that contingent commissions
are an acceptable practice if disclosed to the client (not necessarily specific
amounts, but the practice in general). The insurance brokers placing major
lines of business for UAB are compensated on a fee-for-service basis, and
I advocate that approach for most organizations.
—Jeannine Bailes, Director of Insurance & Risk Finance,
University of Alabama at Birmingham, Birmingham, AL
-
You hit this right on the head in the fourth paragraph. Mr. Spitzer wants
to be NY governor and ultimately (heaven forbid) make a run for the presidency.
The sad thing is, with his actions against both the insurance industry and
earlier against the mutual fund industry, many are just backing down from
him failing, to put up any kind of fight.
Agreed, those few SHOULD be prosecuted for wrongdoing. However, to label
entire industries (insurance and investments) as being unethical smacks
of political gamesmanship!
—James Braga, American Family Insurance, Madison,
WI
-
Jack, couldn't agree more. Mr. Spitzer, and John Garamendi of CA for
that matter, are classic reminders that when it comes to politics, grandstanding
never goes out of style.
—Dennis Gutwein, President, Gutwein Agency, Inc.,
Francesville, IN
-
I agree that Spitzer's approach to the problem reeks of self-promotion.
I do not believe, however, that insurance is a commodity. It may look
like it from the naive consumer's point of view, but they also have a hard
time understanding why they need insurance in the first place. That is why
agents have a job—not by the grace of the insurance carriers, but because
of the real need for them.
It is interesting that steering or bid-rigging is being trumped up as
this huge national crisis. If so, you must make the argument that consumers
around the country are paying more than normal at the agent's benefit. It
is my experience that this is not a state of equilibrium. There is not a
supply shortage of insurance agents or carriers to support this. One of
the great benefits of a free market economy is that while the consumer can
get gouged, it only lasts until the competition's next x-date call.
As for contingent commissions, it is again naive to think they are unethical
or immoral. There is no difference between contingent commissions and volume
based commission rates. If anything, contingent commissions are a necessary
check against spread-sheeting. Do you really think the agent knows the details
of each of the 20 carrier contracts they are quoting?
—Jim Hisatomi, Executive Vice President, American
Benefits, Inc., Portland, OR
-
Insurance carriers should be allowed to pay additional commissions to
agent/brokers for good profitable business. It's that simple, "if" it has
no financial detriment to the insured. Fact: Premiums are going up and commissions
are going down. A brokerage or agency has to make a profit like any other
business. Our clients know this. Let's focus our attention on important
matters like tort reform and affordable healthcare for our business clients,
not on who's offering a few extra percentages here and there.
—Jeffrey Lockhart, Agent, Midlothian Insurance Agency,
Midlothian, TX
-
Market services agreements, profit sharing agreements, contingency agreements—whatever
you'd like to call them—are a thing of the past. Insureds will demand to
know exactly how much their agents or brokers are being compensated for
placing and servicing products and services. I believe fee-based compensation
will eventually end up as the compensation method of choice. There is less
chance of abuse among agents or brokers if a fee is utilized.
—Jace Pearson, Vice President, Marsh, Salt Lake City,
UT
-
I do agree to a large extent with all that you've said, Jack, about the
Spitzer efforts. Unfortunately, political gain from this is one large component
that was on the docket when the original subpoenas were issued. AND, Marsh
and the other brokers should have known that one track could develop as
it has with Spitzer. The most glaring disagreement I have with your opinion
is the profit-sharing agreement and contingent income area. Brokers, by
definition, represent the client not the carrier. Agents, on the other hand,
do represent the carrier and attempt to pass themselves off as brokers.
When brokers started playing by the same rules as agents as a means to
compete and increase income, the line was crossed. It may not be illegal
but it clearly is in violation of what we, as risk managers, perceive as
a violation of the client focused service that they are supposed to provide.
As to bid rigging, you're right. Those that approved, arranged, and condoned
it should be held specifically liable, and the company allowing it to happen
will pay a price anyways. Spitzer is out for the governorship ... and he'll
probably get it now, to the detriment of the industry, its shareholders,
and those of us either involved and/or employed by it.
—Wayne Salen, Insurance Program Manager, IPC, Miami
-
I disagree to the extent that Wal-Mart passes their quantity savings
on to their customer base. Marsh pocketed over $800,000,000 from this process.
—Julian Detore, Mgr.—Risk Mgt. & Contract Administration,
Elliott Co., Jeannette, PA
-
Contingent commissions should be illegal in all jurisdictions. Brokers
should be on a fee-based income structure negotiated directly with their
clients as are all other genuine professionals who provide professional
advice.
If this is not their preference, they should register as agents of the
insurer, and then their role is clear to everyone.
—Richard Gilley, Consultant, Pure Risk Management
Pty Ltd., Sydney, Australia
-
I agree that for the most part insurance professionals are indeed honest
and ethical. But don't be fooled—our business was due for a thorough cleaning,
and could use some more. What about the prevalence of broker rebating—i.e.,
cash payments by brokers directly to clients as incentive to place their
business with them? Or pay-offs to consultants to steer business a broker's
way? Both of these practices defeat competition in its purest sense. The
good part is that all this attention should result in our industry's professionals
having the same status as other corporate "vendors" such as accountants,
lawyers, etc.—something that is long overdue.
—Robert Meder, Director of Marketing, Hagedorn &
Company, New York
-
Yes, it is totally wrong not to divulge all financial income to a client,
no matter their size or if it is public or private. It is underhanded and
slimy to hide and lie about income and the conflict of interest it creates.
If you think this practice is bad in the P&C market, wait until someone
investigates the group health insurance industry and the hidden money and
gifts associated with group health insurance.
—Sam Rosenthal, President, Rosenthal Insurance Consulting,
Inc., Richmond, VA
-
1. A fee based system would never work - you will get clients giving
broker of record letters left and right to whomever has the cheaper fee.
We are selling a product, and I don't know of any other sales industry that
has a fee based compensation structure.
2. The vast majority of retailers see very little benefits contingent
commissions because they don't qualify for the commissions. This is really
a benefit for the big brokerage houses only. We little guys would rather
see the contingents go away and commissions increased.
—Donna McCormick, CPCU, AAI, AIS, CPIW, Managing
Partner, McCormick Insurance Agency, Las Vegas
-
Contingent commissions, I believe, should revert to their more traditional
role—compensating the better producing agencies based more on their loss
ratio than volume (although some volume requirements would be appropriate).
The companies should be able to rely on the better agencies as being their
frontline underwriters and be willing to compensate them accordingly. I
have no problem disclosing contingent agreements with clients. The better
the contingent income, the better job the agency is doing on behalf of the
insurance companies they represent. Therefore, presumably, the closer relationship
with those insurance companies should result in better coverages and prices
on behalf of that agency's clients.
—Bill Castle, Todd Associates, Inc., Cleveland, OH
-
I agree with your comments concerning Spitzer. Like Sherman marching
through Georgia in the Civil War, Spitzer did a lot of destruction to people's
investments and retirement savings to ferret out when a more discrete investigation
would have solved the problem. Perhaps his philosophy is: Why use a surgical
knife when you can use an atomic bomb to attract more attention?
—Stan Oetken, Vice President, Marsh USA Inc., Denver
-
Contingent income was always intended to influence the flow of insurance
placements, Whether profit sharing, retention, or production-based, a fee
or commission on the placement itself with supporting services is what we
believe the agent/broker is earning, and we agree to it up-front. Why should
the agent/broker get anything more? Further, contingent income is funded
by policyholders, who should get a premium reduction rather than the agent/broker
benefiting. Don't get me wrong. If an agent/broker performs services that
further reduce the cost of risk, it should be rewarded accordingly, but
by the policyholder.
Over the years I have seen many policyholders duped because contingent
income influenced the marketing of the business. The business has changed,
and if the industry wants to rise above its current level of public approval.
It could make a real statement by abolishing contingent incentives.
—Craig Thummel
-
As a corporate client, risk manager, and purchaser of insurance for my
institution, I have to say that, by and large, purchasers do not know about
the contingent commission arrangements that brokers may have with insurers.
And, when we have learned about them, are not in favor of them. The client
is never really sure that the broker's advice is not biased toward the better
"back end deal" for them. This situation was particularly suspect during
hard market times and with certain lines of insurance such as medical professional
liability. Since I learned of these types of arrangements, I insist, and
my broker gladly agrees, on negotiated fee-based arrangements for the payment
of broker services.
—Valarie Conrad, Compliance Officer/Risk Manager,
Illinois College of Optometry, Chicago
-
Jack, I share your view of Mr. Spitzer's attack on the industry as a
whole. He makes it sound as though all insurance people are less than honest
law abiding people that have a job that most buyers have little appreciation
as to what it takes to get them adequate coverage. To paint an entire industry
with the same brush does not say much for the "innocent until proven guilty"
theory. Loss ratio incentives have been carriers' incentive to agents/brokers
to maintain and write profitable business—to be their first line of underwriting.
To give a black eye to the industry the way Mr. Spitzer has done is less
than professional in my opinion.
—Wafford Dilliard, Marketing Manger, Reeves, Coon
& Funderburg, Monroe, LA
-
I've been in the business for 38 years, and contingent income has been
around for as long as I have. There is nothing wrong with sharing insurance
company profits with the sales force responsible for those profits. I feel
this controversy will make most insurers want to withdraw those contingent
agreements. Working for a fee does reduce or eliminate the inherent conflict
of interest in commissions, contingent or straight. The problem is that
a majority of insurance buyers still see insurance as a commodity, and if
their premiums are running $200,000, they will be unlikely to perceive that
an agent or broker can provide $20,000 worth of service if we use a 10 percent
fee factor. In essence, I see this as a lose-lose situation for the brokers.
I'm sure the Marshes and Aons of the world will survive, but the little
guys are going to get hammered as usual.
—Frank Cluney, Senior Account Executive, Allied North
America Ins. Brokerage, St. Louis
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