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Over the years, everyone with an opinion has weighed in on this including the Risk and Insurance Management Society Inc. (RIMS), which represents the majority of large insurance buyers.

The issue revolves around the direct relationships that exist between commercial markets and insurance brokers. Deals were struck between brokers and markets that by direct contract between them, terms were negotiated that tied placement volumes to commissions known as "contingent" commissions, since they were a function of the amount of business placed with those markets.

If the contract between the corporate buyer and its broker/intermediary required full transparency in compensation, then short of sheer dishonesty, the broker would disclose how much of their compensation was generated from sources other than direct fees paid by the corporates and/or fully disclosed commissions paid by virtue of the same agreements.

It is not always simple to calculate an amount of contingent commission attributable to any one corporate buyer, but it is feasible to estimate approximately how much may be attributable to any one account might generate. This amount when added to other negotiated fees and commissions presents a more complete picture of compensation earned by a broker for each account. Pretty simple concept, yet the controversy rages on.

Many brokers have never stopped taking contingent commissions from markets despite the controversy. Consolidation in the large broker industry has affected the treatment of this issue with some brokers taking a high road position while others have boldly refused to capitulate.

From a corporate buyer's point of view, this issue has often been viewed as a red herring since the truly informed and savvy buyer understands that transparency in contracts and transactions is all that is needed to address this issue. Well maybe not all. The real lynchpin for a corporate buyer is to ensure that competition among markets is facilitated regularly, especially where there is any question of securing the most competitive terms, conditions and rate.

Where there is any doubt about these issues, it is incumbent upon the buyer to demand the evidence and insist on performance. The very best brokers ensure that this happens as a matter of routine. The best markets participate in the process with the same goal in mind: best value for the premium dollar and commissions paid. What's so hard about that?

The bottom line is that corporate buyers are generally well informed about the products and services they buy. Buyers, together with the markets and the intermediaries, ensure these transactions get done well where there is full transparency and honest and ethical dealings amongst the parties. That's the way all business should be done. How innovative!

CHRIS MANDEL is the enterprise risk manager for a leading financial institution and a former president of the Risk and Insurance Management Society.

September 1, 2010

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