In the Aftermath of 'Brokergate'

The dust has not yet settled after last fall's lawsuit brought against Marsh by New York's Attorney General Eliot Spitzer. Reactions to the bid-rigging charges and contingent commission revelations have been varied. We have seen the good, the bad and the ugly and, well, even some humor as a result of the insurance industry's biggest controversy in years.

By Charles Cox

The good, although not an opinion shared by all, is the focus brought upon the manner in which brokers have been and will be compensated. Buyers have a right to know how and from whom brokers are compensated. Decisions on the purchase of insurance or the selection of a broker should be based on full knowledge of such matters. Whether disclosure is mandated by regulation or by the industry itself, buyers will benefit and that is good. Good will also come from the removal of employees found to have been involved in bid-rigging and other deceptive practices.

The bad has surfaced through various media outlets. Some quotes attributed to insurance industry executives in the aftermath of the scandal, if not just bad, certainly give reason for pause. As global brokers Marsh, AON, Willis and Arthur J. Gallagher took steps to cease acceptance of contingent commissions soon after the controversies surfaced, others have not been so quick.

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Martin Vaughan, chairman and CEO of insurance broker Hilb Rogal & Hobbs Co., says that, in HRH's view, loss-sensitive commissions benefit everybody, and are "not only not bad, but as you might suspect, in a long-lived practice and highly regulated and highly competitive industry, they are a positive force and serve the interest of everybody in the transaction." That might be the case if we presume the insurance buyer is not part of the transaction!

Then there was the quote attributed to Evan Greenberg, former chief executive of ACE Ltd.Asked if brokers would somehow make up for the income lost by the elimination of Placement Service Agreements, Greenberg's reply last October was, "Brokers are a clever animal--don't underestimate them."

Ugly is the overwhelming majority of unwitting Marsh employees whose retirement plans have been ravaged by the decline of their employer's stock value. Ugly are brokerage employees being cast in an unfavorable light, some losing the trust of long-time clients, all through no fault of their own. Ugly is the brokerage firm that, instead of posting press releases about their own firm on their Web site, elected to post newspaper articles about their competitor's troubles resulting from the bid-rigging controversy, a classic case of "piling on."

Some humor can, however, be found in all of this. A recent survey conducted jointly by The National Alliance Research Academy and another insurance publication asked if agents or brokers always recommended the best insurer to fulfill customer needs.

Should anyone be surprised that 97 percent of the producer respondents answered yes? By the way, only 61 percent of the commercial insurance buyers agreed. Then there's the moniker that New York State Assemblyman Alex Grannis placed on the controversy. When speaking to the press in advance of a hearing into the matter, he referred to the mess as "Brokergate."

As we move on, policyholders will be well served to employ open competition as a means of achieving the best coverage for the best price.

There's no doubt that the landscape has changed for brokers and improved for insurance buyers, but the scars from this event will not fade away anytime soon.

CHARLES COX is a regular columnist for Risk & Insurance®.

April 1, 2005

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