Placement Service Agreements are just "not an issue": a broker's close relationship with a carrier adds value for the buyer of commercial insurance

Risk & Insurance, August, 2004

New York Attorney General Eliot Spitzer has issued subpoenas to several leading insurance brokers relating to Placement Service Agreements. The agreements between commercial insurance brokers and the insurance carriers with which they do business are not an issue of concern in the industry.

PSAs are paid to brokers by carriers based on their overall relationship and the services provided by the broker for the carrier. PSAs are not linked to placement of a specific policy. It is the industry standard to disclose these arrangements to commercial customers.

Customers are entitled to whatever information they need about the arrangements to make an informed purchasing decision. Arrangements like these frequently provide a value-added benefit to the commercial customer, who can benefit from the broker's relationship with the carrier.

The Council of Insurance Agents & Brokers has been on record for nearly six years as favoring disclosure of PSAs, which are widely used and understood in the industry. Disclosure is the industry standard and is always the best way to avoid conflicts or suggestions of conflict.

The Risk and Insurance Management Society, which represents the risk management experts who negotiate for the companies purchasing commercial property/casualty insurance, endorsed a similar position in 1999. According to an official statement from RIMS, "Compensation arrangements are endemic to the manufacturer/distributor relationship and there is nothing inherently wrong with them. However, the insured has a right to know the total compensation received by a broker whether that compensation is specific to the insured or on some other basis such as business volume or profitability. All sources of broker compensation, direct and indirect, should be disclosed in compliance with the law, just as income from fiduciary funds is disclosed in broker financial statements. When involved in competition for the best coverage, all broker compensation by each carrier should be disclosed on each line of business. Risk managers should be aware of the existence of contingency fees whether for an overall book of business, or for individual primary and reinsurance placements. Open discussion of compensation should become part of the dialogue between brokers and buyers when business is placed. Keeping silent of such arrangements is contrary to the spirit of partnership which risk managers seek to achieve with their brokers and insurers."

The Council is not aware of any customer complaints relating to the existence of PSAs or lack of knowledge on the part of commercial customers about those arrangements.

Commercial property/casualty customers are sophisticated buyers of insurance. The Council has confidence that they are aware of these arrangements and understand their purpose.

A broker is charged with finding the best risk coverage solutions for his or her commercial customers. It is incumbent upon brokers to research the market fully and present a range of options, then work with their customers to find the coverage that meets their needs, both in terms of cost and scope.

A commercial customer works with a broker who can provide value-added services because of his or her access to markets and ability to negotiate favorable terms and conditions. Commercial insurance products are not commodities; they are customized risk transfer tools.

The best broker for a given customer or group of customers is the one who has a relationship with the carriers that have the products that serve those customers best.

The COUNCIL OF INSURANCE AGENTS & BROKERS represents the largest commercial insurance agencies and brokerage firms. This statement, edited to fit the page, was adapted from an April press release issued by CIAB and includes an excerpt from RIMS' official position statement on contingent compensation.