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By DAN REYNOLDS, senior editor of Risk & Insurance®

Now here comes the New York-based Risk and Insurance Management Society Inc. (RIMS) with a refreshing piece of advice when it comes to the thorny issue of insurance brokers' commissions.

The advice? Let the free market decide.

In a webinar broadcast on Friday, Terry Fleming, RIMS vice president and the director of risk management for Montgomery County, Md., and Bill Kelly, a former president of RIMS and the current president of WJK Advisory LLC, took on the issue.

If you haven't noticed, the issue of commissions, particularly contingent commissions, was given a kick-start a few months ago with the announcement by Illinois Attorney General Lisa Madigan that she would again allow home state brokerage Arthur J. Gallagher & Co. to accept contingent commissions.

On Friday, Kelly and Fleming said, in essence, "Who cares what the regulators are doing?" You, Mr. and Mrs. Risk Manager, have all the power of the free market behind you in deciding what sort of fee or commission arrangement you want from your broker.

RFP ACTION

When risk managers write their RFPs, advised Kelly, along with language about timelines, rules and qualifications, risk managers ought to include specific language that prohibits any broker from taking contingent commission revenue, if that's the way risk managers want to play it.

"You say, OK, tell me what your compensation, overall, is going to be. How much am I paying for this? And the RFP should indicate the expected basis and projected amount of all compensation to be received by the broker who is responding, and any affiliates or other broker entity throughout the world," said Kelly.

"So, it's using the competitive process to achieve disclosure and a higher level of professional performance," Kelly said.

In other words, it's a free market and, even more to the point, it's a soft insurance market. That means it's a buyer's market, and any buyer should feel comfortable telling their broker what they expect of him.

SERVICE AGREEMENT TOOL

Another tool that Fleming and Kelly pointed to is the level of service agreement. Kelly called them a "best practice" in managing a broker relationship. That's because they give risk managers a chance to review, on a quarterly or semiannual basis, their terms of service with a broker, and whether that broker is adhering to those terms of service. Included in that is whether brokers are being transparent with insurance buyers in the area of compensation.

If the broker isn't behaving properly around compensation and you can document that he or she isn't in your level of service reviews, than you've got grounds to break your contract with the broker, Fleming said.

"The only thing we have to fall back on since the fees are legal is that level of trust between each other, and I think that is where the transparency and the contract agreements to hold them accountable come in," Fleming said.

Contingent commissions are in essence commissions paid to brokers by insurance carriers for sales those brokers bring to the carrier. Because buyers are already paying brokers a commission, a broker who accepts a commission from a carrier is engaging in a conflict of interest, critics have argued.

Supporters of such commissions say the extra revenue is warranted, so long as brokers disclose them to buyers.

The New York State Insurance Department is now working on regulatory language to address the issue of transparency should it again agree to give Gallagher's rivals, such as Marsh and Aon, the leeway to accept contingents.

November 16, 2009

Copyright 2009© LRP Publications