Dwellers of the valley of the rifts: "buyer beware" need not apply henceforth, proclaims Marsh's new CEO. Yet Aon's chairman beseeches buyers to simply "be aware."

Risk & Insurance, June, 2005 by Cyril Tuohy

At the annual convention of the Risk and Insurance Management Society Inc. in Philadelphia this April, a brief 10-second exchange offered a glimpse into the deep fissures separating the managerial visions of four of the chief executives running the nation's top insurance brokerage firms.

Responding to a question from the audience about how the CEOs differed in ways that really matter to insurance buyers and risk managers, Michael G. Cherkasky, CEO of Marsh & McLennan Cos. Inc., still seated in his chair, moved a few feet to his right. The audience understood the nuances of his act and erupted in laughter.

Cherkasky, the top representative of Marsh Inc. the old-line New York-based firm which in January agreed to settle allegations of bid rigging with state regulators for a staggering $850 million, signaled that under his watch Marsh would be different.

The incident could not have better represented the differing visions of how an insurance brokerage should be run. There sat Cherkasky, a former regulator, separating himself from the pack, in particular Aon Executive Chairman and former CEO Patrick G. Ryan.

To Cherkasky's left were the "three Irish guys from Chicago," in the words of one executive. The three executives were J. Patrick Gallagher Jr., CEO of Arthur J. Gallagher & Co., based in the Chicago suburb of Itasca, Ill., Martin Hughes, CEO of HUB International, whose executive offices are based in Chicago, and Ryan, whose company, the No. 2 insurance broker, is also headquartered in Chicago.

The "Chicago three," with little regulatory experience if any, stood firm in their advocacy of free market forces in all transactions governing the insurance purchasing relationship between buyer and broker.

ESCHEWING CONTINGENTS OUTRIGHT

Of all the chiefs representing the major brokerages at RIMS, Cherkasky has been the most adamant about eschewing the contingent commission structure, an extra revenue stream generated to the broker by the insurance carrier.

"At Marsh, what we're going to do, No. 1, we're not going to take contingencies anywhere in the world," he said. "I'll tell you my personal opinion. I don't believe that contingencies are appropriate."

Even if many people believe they can get away with it, he said, "I don't think they are right."

The changes at Marsh, he also said, will come about because the firm will no longer be driven by transaction volume, but by a profit and loss mentality.

The company, he said, will not hesitate to drop "thousands, if not tens of thousands of clients," and lay off the commensurate number of employees.

Instead of the contingent commission structure, Cherkasky said Marsh would adopt a new standardized commission rate card from insurers to compensate brokers. Brokers are not free to charge what they want. "The simple fact is you can't have a market where someone pays you 10 percent and someone else pays you 8 percent," he said.

Seeking to restore investor and client confidence in his firm, Cherkasky wasted no time in taking the moral high ground and promising to bury his firm's old habits.

He also publicly admitted Marsh's mistakes. "We did some things we shouldn't have done," he said. "And we need to fix it in a way that gives back that trust. If we don't have trust, you're not going to believe our advice or appreciate our access."

Cherkasky, the former CEO of the security firm Kroll International, was one of New York Attorney General Eliot Spitzer's mentors.

He has never himself been an insurance broker, nor has he had to sell insurance policies to make a living. In an interview with Risk & Insurance[R] last December, he promised that Marsh would not follow a strategy of caveat emptor, or "let the buyer beware," when it came to servicing buyers.

Long a competitor of Marsh on the commercial battlefield to represent the interests of insurance policy buyers, London-based Willis Group, the No. 3 broker, found an ally in Marsh when it came to contingent commissions.

Willis CEO Joseph Plumeri, in his keynote address at RIMS, said the practice of paying contingent commissions to brokers should be banned.

"Contingent (commissions) should be abolished throughout the industry," he said. "Carriers shouldn't pay them and brokers shouldn't accept them."

The practice, he also said, leads to the commoditization of insurance. These conditions undermine the interests of commercial insurance buyers and risk managers.

"This approach also invites the perception of conflict that comes with contingent commissions that's inconsistent with client advocacy and therefore is unacceptable," he said.

"If contingents create the appearance of conflict with some brokers, they should create that appearance for every broker," he said. "I don't understand why insurance companies still do that with a lot of brokers."

Like Marsh, Willis also settled with regulators, by agreeing in April to set up a $50 million fund to reimburse clients.

But even as Cherkasky and Plumeri called for an end to contingent commissions, chiefs of other brokeage houses preferred to highlight their commitment to disclosing their income sources instead of talking about closing off a potential income stream.