How buyers can slide back into the driver's seat: risk managers have an important role to play in keeping their brokers honest and fair in the wake of allegations of bid rigging, steering and contingent commissions, one consultant argues

Risk & Insurance, June, 2005 by Charles Lee

All the heat arising out of the brokerage contingent commission, steering and bid-rigging allegations has not only affected brokers, but risk managers too. We've heard the comments about how and why risk managers let their companies become victims.

At the recent meeting of the Risk and Insurance Management Society in Philadelphia, the organization's incoming president, Ellen Vinck, did not mince words when noting the role risk managers may have inadvertently played in creating the current brokerage drama.

"I wonder if we would be discussing this today if every risk manager settled for no less than transparency in its truest form back in 1998," said Vinck, referring to the year that RIMS first challenged the brokerage industry on the practice of contingent commissions, "if we had been more vocal about the conflicts of interest that many of us were concerned about. But we didn't."

The point may be valid, but in this situation, it's important not to give in to the temptation to pass the blame around like a hot potato; from broker, to risk manager, back to broker. That is an understandable temptation. But it is unproductive and, ultimately, not likely to lead to any meaningful reform.

Rather, risk managers can actually drive reform in the brokerage business by improving the way they buy insurance brokerage services. If we want to professionalize the brokerage business--with all that entails about assuring higher ethical standards--then it is essential to improve the methodology by which brokerage services are obtained.

Early this year, top broker Marsh & McLennan Cos. negotiated a $850 million settlement agreement with New York State Attorney General Elliot Spitzer and the New York State Insurance Department, after a highly publicized investigation into the company's contingent commission practices and allegations of steering and bid rigging.

The other two top brokers, Aon Corp. and Willis Group Holdings Ltd., followed suit, agreeing to settlements of $190 million and $50 million, respectively. None of the three brokers admitted to or denied fraudulent practices or wrongdoing. All have since ceased the practice of contingent commissions.

Given the current controversy, some may question the need for brokers in the first place. It is important to remember that present state-by-state licensing laws dictate the need for an intermediary between the insurance buyer and the nondirect writing insurance company. (A direct writing insurer, such as Liberty Mutual, doesn't need to use a broker.) Nevertheless, in addition to meeting statutory requirements, many believe brokers provide a very real service for both insurers and corporate customers.

Historically, the current brokerage business represents an improvement on what for years had been a simple "agency" business. Insurance agents sold policies to businesses and were clearly aligned with the interests of insurers as sellers.

That led buyers--who generally felt that they suffered from an information and knowledge disadvantage in negotiating with agents--to be concerned that they may not be getting the best insurance coverage at the best rate, and a recognition that the agent clearly profited from selling more insurance that might not be in the policyholder's best interest. The insurance being sold might be good for the insurer and good for the agent, while it might not be good for the buyer.

The brokerage business, in principle, realigned these interests. Brokers were supposed to represent the interests of buyers before those of the insurer. The value of brokers, in principle, was their superior knowledge of insurer capabilities, practices and costs, along with superior understanding of corporate customer needs.

These needs included the desire for some corporate customers to integrate insurance with other aspects of their financial strategy into a broad-based total risk management strategy. Along with this change came the expected and frequently stated values of trust and integrity.

The current scandals have really done nothing to undermine this fundamental, conceptual value of the brokerage profession as a trusted advisor. The value of superior information and understanding is still very real.

REALIGNING MISALIGNED INTERESTS

The scandals are fundamentally about a misalignment of interests and challenge the expectation of trust and integrity. Brokers guilty of steering and bid rigging are not aligned with the interests of insurers nor are they aligned with the interests of corporate customers. They appear to be only aligned with their own interests.

The goal of any reform of the brokerage business should be to again realign the interests of brokers with the interests of their customers---the fundamental ethical standard of any profession--to rebuild the critical values of trust and integrity. The way to restore the alignment is to create a demand for professional behavior on the part of brokers.

During the course of my consulting career, I have been impressed with the professionalism with which some risk managers select their various service providers, including brokers. They also tend to manage those relationships just as professionally.