CIAB (US) Statement on Broker Compensation

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Oct. 28, 2004 – WASHINGTON – The following is a statement from Ken A. Crerar, president of The Council of Insurance Agents & Brokers, on broker compensation.

The Council represents the top tier of commercial insurance brokers who annually write 80 percent of the property/casualty insurance premiums and administer billions of dollars of employee benefit accounts.

“As the initial shock of New York Attorney General Eliot Spitzer’s allegations of wrongdoing against Marsh and McLennan Companies, Inc., begins to subside, the commercial insurance marketplace now is beginning to grapple with what needs to be done to restore client confidence. We are seeing some brokerage firms make changes in their compensation structures, while others are adopting a more cautious “wait and see” approach.

In the end, however, every broker is trying to do the right thing for clients and the business.

Given the gravity of the charges that have been made, it is unlikely the insurance industry ever will return to “business as usual.” Undoubtedly, the compensation structure will evolve, but it is simply too soon to tell what changes in broker compensation may occur as a result of the Spitzer inquiry.

Some of the largest brokers – Marsh, Aon, Willis, Arthur J. Gallagher and Jardine Lloyd Thompson Group – have stated that they no longer will accept contingency commissions. But with the exception of Ace and AIG, two insurers implicated in the Spitzer inquiry, no other commercial insurer has stated that it is no longer willing to pay them.

Contingency commissions are both legal and proper, and they have played an important and long-recognized role in the insurance equation. The debate over proper compensation for the professional services brokers provide is far from over. But however the compensation system for brokers evolves, it is imperative that there be transparency and disclosure.

The Council has been on record since 1998 calling for full disclosure and transparency of contingency commission arrangements. The Risk Insurance Management Society, the largest association of commercial insurance buyers, also has looked at contingent commissions and concluded there is no problem as long as they are properly disclosed. Even the New York Department of Insurance reviewed the practice in 1998 and issued a rule – contained in New York Department of Insurance Circular Letter No. 22 – requiring the disclosure of such income if it is received in connection with a client’s account.

Good business can withstand scrutiny. Disclosure is always the best defense against conflict or the appearance of conflict.

At the end of the day, the foundation of the commercial insurance business is trust between broker and client. When that trust is called into question by the actions of a few, everyone suffers.

Brokers must talk to their clients and be sure that they understand exactly what they are paying for. Those customers are sophisticated, professional buyers who frequently are handling multimillion-dollar risks, and they understand that coverage at the best price is not necessarily the best coverage or in their best interest.

Commercial insurance clients know it is the broker who works to be sure that the coverage options contain the best terms and conditions available, and that the overall quality, capacity and solvency of the carrier is appropriate for the risk.

For decades, brokers also have received contingent commissions to compensate them for other professional services they perform for carriers on behalf of their commercial clients. They are a reflection of the role the broker plays as a de facto front-line underwriter. Although contingent commissions account for only about 5 percent of the revenue of brokerage firms, they are a leading indicator of the quality of business in the broker-insurer relationship. When a broker provides risk management expertise to a client, thus reducing exposure to insured claims, everyone – client, broker, insurer – benefits. Without any kind of a reasonable compensation for this service – which can be determined only after a loss history is established – the value of the broker and the incentives for good risk management can be eroded.

All of these issues are relevant, defensible and important for the commercial customer. They are the very basis of the personal, relationship-driven nature of insurance. Those relationships are forged broker by broker, client by client, company by company. But the critical element of each is transparency.”

The Council of Insurance Agents & Brokers is the voice of the market leaders and the premier association for commercial insurance and employee benefits intermediaries in the United Statesand abroad. From its headquarters in Washington, DC – with programs conducted throughout the nation and world – The Council represents the largest, most productive, and most profitable of all commercial insurance agencies and brokerage firms. Only the top one percent of all agents and brokers qualify. The Council’s members in more than 3,000 locations, place 80 percent — well over $90 billion — of all U.S.insurance products and services protecting business, industry, government and the public at-large, and they administer billions of dollars in employee benefits. Since 1913, The Council of Insurance Agents & Brokers has worked in the best interests of its members, securing innovative solutions and creating new market opportunities at home and abroad. Web site: www.ciab.com.