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Risk managers at companies with significant exposures remain as concerned as ever about the cost of insurance. But with the exception of the property catastrophe markets, most rates for commercial insurance held steady or fell during 2006, making it more difficult for a truly exceptional broker to really prove his or her worth to the client.

Indeed, for many risk managers, the operating theme with their broker or brokers remains "What have you done for me lately?" And that theme has been repeated throughout interviews with more than 250 risk managers that were held in conjunction with identifying the 2007 Power Brokers by Risk & Insurance®.

Those results are being tallied and will be reported later this winter when the firm releases its annual look at insurance brokers and their relationships with their clients.

The prospect of falling insurance rates has not deterred risk managers from looking for creative, alternative risk mechanisms from their brokers, kind of a what-have-you-done-for-me-lately phenomenon.

For the third quarter of 2006, the Council of Insurance Agents and Brokers reported that commercial insurance prices fell an average of 5.3 percent for all sizes of accounts compared with the year-earlier period.

Certainly, research for the Power Brokers uncovered examples where top-notch brokers were able to crack problems in the Southeastern U.S. property-catastrophe market and provide clients with the capacity they needed, along with a price increase in the double-digit rather than triple-digit range. But it's challenges and solutions in areas other than pricing that catch the attention of risk managers. Here are some examples:

A broker who reworked a Fortune 500 casualty account and was able to cut costs beyond what the market was offering along with identifying important exposures that had been overlooked in the past.

A captive that was initially designed to be a response to the escalating rates remains in place when rates drop and the client is able to see a decline in losses that exceeds the cost of coverage even in a competitive marketplace.

It's that kind of hard work linked with creative proposals that remain the most consistent themes reported by risk managers when they identified candidates to be a Power Broker this year.

Most risk managers agree that the changes that have happened in the wake of the investigations during the past few years have helped the industry and have improved buyers' relationships with their brokers.

In the wake of the investigations, most risk managers agree that transparency of all fees and commissions is essential to a good relationship between the broker, the risk manager and the insurer. These results parallel the feedback from risk managers in the annual survey by Greenwich Associates.

The 2006 Greenwich survey found increasing support, especially among U.S. risk managers, for transparency and a change in how brokers are compensated. The survey, sponsored by the ACE Group of Companies, looked at three reforms proposed by ACE which, it said, were "aimed at realigning the commercial insurance market and making certain that it is acting properly and in a transparent fashion."

ACE prohibits the payment of "contingent commissions" to brokers and discloses all commissions paid to brokers on the declarations page of an insurance policy.

BUYER-BROKER SPLIT

The survey found that a majority of risk managers endorsed the idea that brokers ought to be entirely compensated by their clients--the insured--rather than receive compensation, mostly in the form of commissions, from insurers.

That echoes the view espoused last year by former Risk & Insurance Management Society president Ellen Vinck, who personally advocated that all broker compensation should come from the client rather than the insurance company.

The official RIMS position does not prohibit other kinds of compensation from insurance companies as long as all compensation is transparent and disclosed to the client. That disclosure, the RIMS policy states, should come regardless of whether the client has made a request for that information or not.

Brokers remain tied to the traditional commission system where most of their compensation comes as a commission from the insurance company, even though most of the largest brokerage firms now prohibit such "contingency fees."

Only about half of the brokers in the Greenwich survey agreed with the statement that "Brokers should be fairly compensated by their clients, not by insurers."

In contrast, 79 percent of U.S. risk managers endorsed compensation wholly by clients rather than insurance companies.

The contrast was even more dramatic in Europe where only a third of the brokers said that client compensation was the best way to reward brokers and only about half of the risk managers agreed.

While 69 percent of European risk managers said that they either strongly agreed or agreed with the statement that brokers should be solely compensated by clients, 43 percent of European brokers strongly disagreed or disagreed with the principle that brokers be compensated for their work only by clients.

UNITED ON DISCLOSURE

The Greenwich survey also asked risk managers and brokers whether they agreed with the statement that "There should be full and complete disclosure by brokers to their clients of all quotations for insurance along with their recommendations."

There was a much higher level of agreement here between risk managers and brokers, although risk managers could see little if any reason to avoid disclosure.

Among U.S. risk mangers, 91 percent surveyed "strongly agreed" that brokers should disclose all quotations and another 6 percent "agreed," bringing the total for risk managers to 97 percent. European risk managers were a bit less enthusiastic about broker disclosure, with 76 percent registering strong agreement and 16 percent saying they "agreed."

While both brokers in the United States and Europe generally support disclosure by brokers of commissions and fees to clients, they were slightly less supportive of the idea than their clients.

More than two-thirds of U.S. risk managers, European risk managers and U.S. brokers agreed with the statement that "Brokers should be required to set forth ground rules for the insurance placement process before any bids or quotations are solicited from insurers."

In contrast, only 56 percent of European brokers only agreed with that.

JACK ROBERTS is editor in chief of Risk & Insurance®.

January 1, 2007

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