The Broker Crisis
When the news broke of New York Attorney General Eliot Spitzer's lawsuit against Marsh for, among other things, bid rigging, it plunged the insurance industry, and the brokerage community in particular, into turmoil. In the weeks since then, the CEO of Marsh resigned and there was a major reshuffling of executives and even changes on the board of directors. Although the dust has yet to settle, a few interesting aspects of the situation have emerged.
One of these was the reaction of the other brokers. Marsh, and other major brokers like Aon and Willis, immediately said they would stop receiving the contingent commissions that were at the heart of the matter. Other brokers, however, were not so quick to disavow that revenue stream. The CEO of Brown & Brown said there was nothing wrong with contingent commissions, per se, and that they were vital to the survival of the brokerage system. This may not have been unexpected since those commissions probably constitute a higher percentage of income for the so-called "middle market" brokers, making it easier for the giants like Marsh, Aon and Willis to give them up. The other point that J. Hyatt Brown made was that "the issue is bid rigging," not contingent commissions. This may be a convenient way to compartmentalize the issues involved, but it overlooks the role that such commissions played in the bid-fixing schemes.
National groups representing producers, such as the Independent Insurance Agents & Brokers of America (IIABA) and the Council of Insurance Agents & Brokers (CIAB), have taken a similar stance. They urged the National Association of Insurance Commissioners (NAIC) not to restrict contingent commissions, calling them a legitimate method of compensation to a broker for "extra services" provided to the insurer "on behalf of the commercial client."
Another interesting result of this mess has been the reaction, or lack thereof, from insurance buyers. As the National Underwriter asked in a recent editorial, "Where Is The Outrage?" Except at those companies that were shown to be the subject of some of the rigged bids, the risk management community has been relatively quiet about this whole matter. The Risk and Insurance Management Society (RIMS) issued a brief statement early on expressing shock, distress and disappointment, but has been relatively silent since. That editorial speculated that RIMS' silence might be a result of the conference revenues the Society receives from brokers, but that does not explain the lack of outrage from individual risk managers. Perhaps they are simply embarrassed at being tricked.
So, where does an insurance buyer go from here? When you are looking for the best insurance program for your organization, the one thing that we have always advocated is competition. And it is clear that competition among insurance companies is not enough. You must have more than one broker bidding for your business. One of the elements that allowed Marsh to rig its bid process in the first place was the fact that they were "marketing" those renewals internally and did not have to risk losing the business to another broker.
An interesting sidelight to all of this came from a semi-annual survey of brokers and buyers that the National Underwriter conducts on the "State of the Market," conducted for the Fall of 2004 before the results of Mr. Spitzer's probe were made public. Seventy-six percent of the brokers said their clients rely heavily on their advice and guidance in navigating the insurance market but, when the same question was posed to buyers, only 38% said they rely heavily on their brokers. We suspect that this number would be even lower were the survey to be conducted today.
-- Christopher B. Ashton, CEBS
Vol. XVII, No. 5
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The biggest news story of last month by far in the insurance industry was the legal problems at Marsh. It appears at this point that they have done some major housecleaning to accommodate the New York Attorney General and, when Marsh's CEO, Jeffrey Greenberg, resigned, they were able to stave off criminal charges against the company. A criminal conviction may have proved fatal to Marsh, as it did to Arthur Anderson. What remains to be seen, however, is the financial impact this scandal will have over the long run. In the short term, Marsh is looking at a minimum of $500 million to settle AG Spitzer's civil suit plus possible disgorgement of the contingent commissions that were at the heart of the problem, which were $845 million in 2003, alone. Then there are the private lawsuits and class actions over the rigged bids. The problem for those suits will be to establish compensatory damages, since the lack of real bids makes it difficult to prove what the insurance would have cost in the absence of the rigged bids. But not all the industry news was about fraud and scandal. Fireman's Fund announced that they would let their Homeowners policyholders treat the four hurricanes that hit Florida as one event, making the damage caused by them subject to a single deductible. They certainly did not have to do this, as their policy language was clear in specifying separate deductibles. Over 2,500 policyholders were affected. --- Ed.
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