Newsletter Sign-up

European insurance executives and commercial insurance buyers are miffed. At the time when lower rates should give them reason to celebrate because of better terms and pricing, they maintain that brokers are looking to slap them with extra fees instead.

The soft market has decimated the incomes of some brokerage houses, which argue that they continue to provide the same level of service as in a hard market. As a result, brokers have sought to make up the losses by charging an extra commission to the carriers.

Dirk Verbeek, chairman and CEO of Aon Risk Services International, said the 2.5 percent commission is justified for the services a broker provides in a rapidly changing marketplace heavily dependent on expensive technology.

But critics of the move, speaking at the conference of the Federation of European Risk Management Associations in October in Geneva wondered aloud if the fee was not an effort by brokers to "sort out" their business models at the expense of clients and carriers.

One executive for a large carrier called such extra commissions a "rescue."

"I see no reason for AXA to go to the rescue of a large broker," said Jean-Paul Rignault, CEO of the Paris-based French giant AXA Corp. Solutions.

"To pay a broker the same percentage when the market's going down, it's not acceptable," said Clive Tobin, CEO of XL Insurance.

The extra commission comes out of the carrier's bottom line. But if the carrier isn't prepared to absorb the cost, then the money comes out of the corporate insurance buyer's pocket in the form of higher premiums.

But even as carrier executives were speaking tough about restricting commission payments to the brokers, brokers were taking just as aggressive a line about chasing what they believe is due to them for the service they provide.

"The insurer can find 2.5 percent somewhere," said Sarah Turvill, chairwoman of Willis International. "What's important is to get consent." Asked why brokers in Europe need even more money than the 15 percent to 20 percent they already receive for their services, Turvill said, "If there's more money to be gotten, if you don't ask, you won't get it."

Aon rivals Marsh and Willis Group were expected to introduce a similar charge in the United Kingdom in October, according to news reports.

The issue of ending the habit of carriers paying brokers extra commission income has never had the kind of traction in Europe that it had in the United States in the wake of the price-fixing investigations by former New York Attorney General Eliot Spitzer.

An effort two years ago by FERMA to pressure brokers to stop the practice of receiving payments from carriers was unsuccessful, and brokers in Europe have since shown few signs of wanting to publicly give up any stream of revenue.

"It's still a problem," said Marie-Gemma Dequae, president of FERMA, which represents 16 risk management associations in 15 countries. "It's a problem at the company level for us, and for FERMA it's still a problem. It's still disappointing for us."

Exactly how brokers are paid remains a divisive issue among carriers that can't agree on whether it's best to pay brokers flat fees or commissions of one kind or another.

Nick Beck, head of corporate clients for Swiss Reinsurance Co., argued for a flat fee. "Insurance pricing is more art than science, and I would encourage this model to be based on a fee," he said. "However, it is difficult to price insurance on a single deal. But I clearly think that a flat fee should be considered."

But Tobin hinted that a commission-based compensation structure was more appropriate because it provided incentives for the right behaviors. "On the subject of commission, you want to drive value with the right behavior," he said. "We need to generate new products, and for the broker to help generate new products there's a value there."

While carriers are fractured over how best to compensate brokers, they seemed united on one issue at least. Blanket price increases to either a commission-based or to a fee-based model were out of the question in the current soft market.

"Across-the-board increases are not appropriate," said Jeremy Brazil, director of London underwriting for Markel International.

December 1, 2007

Copyright 2007© LRP Publications