Point: More Transparency is Always Good
It looks like the reputational black eye that the insurance industry suffered more than five years ago over contingent commissions wasn't enough of a lesson.
True transparency on brokerage compensation remains elusive. The situation hasn't been helped by regulators, such as those in New York, who at first banned contingent commissions, then lifted the ban in 2010.
If contingent commissions were viewed as a conflict of interest in 2008, what changed about them in 2010?
If we had industry-wide transparency, then most risk managers would know that a broker's commission rates can vary widely, from, say 10 percent for a workers' compensation risk to much higher for other, more exotic risks. But the industry does not provide that transparency.
Why is this range in compensation not more widely discussed? Why does it remain in the shadows?
Without regulation of contingent commissions, brokers can get paid by carriers based on the price and volume of the business they bring them.
It bears repeating that any system of compensation that rewards a broker for arranging a higher premium for the purchaser of insurance is problematic. On its face, such an arrangement creates a conflict of interest.
Brokers can provide a variety of crucial services, from the modeling of a property/catastrophe risk, to providing workers' compensation risk management consulting. Brokers can and do provide those services in either direction, to the purchaser of insurance or the carrier.
But unless the source and amount of compensation are clearly understood, what is to stop the broker and the carrier from unfairly and without the buyer's knowledge, shifting costs to the buyer of insurance?
If a broker is performing services for the carrier and the carrier is shifting the cost of that service to the buyer, charging a higher premium and paying the broker a higher commission, we have self-serving behavior.
Risk managers should remind themselves that they are in a market where the price of the product they are buying is being controlled by supply and demand. Too much capital chasing business means low prices for insurance. That means carriers are in hot competition. Savvy risk managers should leverage this and demand transparency.
Allowing brokers and carriers to charge higher prices to buyers and in the bargain, not providing them with the best service, is a violation of ethics, whether somebody catches you or not. Ethics and profits can go hand in hand, and it's time in this industry that they did.
Dan Reynolds is editor-in-chief of Risk & Insurance®. He can be reached at email@example.com.
October 1, 2013
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