Responding to a question from the audience about how the CEOs differed in ways that really matter to insurance buyers and risk managers, Michael G. Cherkasky, CEO of Marsh & McLennan Cos. Inc., still seated in his chair, moved a few feet to his right. The audience understood the nuances of his act and erupted in laughter.
Cherkasky, the top representative of Marsh Inc. the old-line New York-based firm which in January agreed to settle allegations of bid rigging with state regulators for a staggering $850 million, signaled that under his watch Marsh would be different.
The incident could not have better represented the differing visions of how an insurance brokerage should be run. There sat Cherkasky, a former regulator, separating himself from the pack, in particular Aon Executive Chairman and former CEO Patrick G. Ryan.
To Cherkasky's left were the "three Irish guys from Chicago," in the words of one executive. The three executives were J. Patrick Gallagher Jr., CEO of Arthur J. Gallagher & Co., based in the Chicago suburb of Itasca, Ill., Martin Hughes, CEO of HUB International, whose executive offices are based in Chicago, and Ryan, whose company, the No. 2 insurance broker, is also headquartered in Chicago.
The "Chicago three," with little regulatory experience if any, stood firm in their advocacy of free market forces in all transactions governing the insurance purchasing relationship between buyer and broker.
ESCHEWING CONTINGENTS OUTRIGHT
Of all the chiefs representing the major brokerages at RIMS, Cherkasky has been the most adamant about eschewing the contingent commission structure, an extra revenue stream generated to the broker by the insurance carrier.
"At Marsh, what we're going to do, No. 1, we're not going to take contingencies anywhere in the world," he said. "I'll tell you my personal opinion. I don't believe that contingencies are appropriate."
Even if many people believe they can get away with it, he said, "I don't think they are right."
The changes at Marsh, he also said, will come about because the firm will no longer be driven by transaction volume, but by a profit and loss mentality.
The company, he said, will not hesitate to drop "thousands, if not tens of thousands of clients," and lay off the commensurate number of employees.
Instead of the contingent commission structure, Cherkasky said Marsh would adopt a new standardized commission rate card from insurers to compensate brokers. Brokers are not free to charge what they want. "The simple fact is you can't have a market where someone pays you
10 percent and someone else pays you 8 percent," he said.
Seeking to restore investor and client confidence in his firm, Cherkasky wasted no time in taking the moral high ground and promising to bury his firm's old habits.
He also publicly admitted Marsh's mistakes. "We did some things we shouldn't have done," he said. "And we need to fix it in a way that gives back that trust. If we don't have trust, you're not going to believe our advice or appreciate our access."
Cherkasky, the former CEO of the security firm Kroll International, was one of New York Attorney General Eliot Spitzer's mentors.
He has never himself been an insurance broker, nor has he had to sell insurance policies to make a living. In an interview with Risk & Insurance® last December, he promised that Marsh would not follow a strategy of caveat emptor, or "let the buyer beware," when it came to servicing buyers.
Long a competitor of Marsh on the commercial battlefield to represent the interests of insurance policy buyers, London-based Willis Group, the No. 3 broker, found an ally in Marsh when it came to contingent commissions. Willis CEO Joseph Plumeri, in his keynote address at RIMS, said the practice of paying contingent commissions to brokers should be banned.
"Contingent (commissions) should be abolished throughout the industry," he said. "Carriers shouldn't pay them and brokers shouldn't accept them."
The practice, he also said, leads to the commoditization of insurance. These conditions undermine the interests of commercial insurance buyers and risk managers.
"This approach also invites the perception of conflict that comes with contingent commissions that's inconsistent with client advocacy and therefore is unacceptable," he said.
"If contingents create the appearance of conflict with some brokers, they should create that appearance for every broker," he said. "I don't understand why insurance companies still do that with a lot of brokers."
Like Marsh, Willis also settled with regulators, by agreeing in April to set up a $50 million fund to reimburse clients.
But even as Cherkasky and Plumeri called for an end to contingent commissions, chiefs of other brokeage houses preferred to highlight their commitment to disclosing their income sourcesinstead of talking about closing off a potential income stream.
It's worth remembering that many of today's insurance broker CEOs were yesterday's brokers, or "producers," drilled in the art of increasing the revenue by finding new sources of commissions.
DEFERRING TO THE
In sharp contrast to Cherkasky, who believes firmly that the marketplace needs to say 'no' to contingency fees, Aon's Ryan, for example, appears much more forgiving about allowing supply and demand in the marketplace to ebb and flow of its own free will.
"I think that the contingent commission for Aon should be gone, it's right to be gone, but I can't speak for another broker or agency and their relationships with their clients, their relationships with their markets," said Ryan.
"That's something for the free market. What I do think is essential is that it be fully transparent. If in fact the buyer says, 'I think it's fine that my broker or agent makes a contingent commission, that's a business decision that's made and I'm not going to try to interject myself into that."
Ryan says the onus is on risk managers to figure out what they are paying their brokers.
Transparency will go a long way toward helping risk managers clarify their broker's position, in effect helping buyers "be aware" of their relationship with their brokers.
"You need to know what you're paying," said Ryan. "Then you need to make the judgment on what you're getting. You make the judgment on whether you're getting it from the right firm, and you're paying the right price.
Breaking ranks with Cherkasky, Ryan, whose firm settled with five regulatory agencies in March for $190 million, said standardized commissions are out of the question.
"We're not going to have standardized commissions. It's a free market," said Ryan. "You have to understand what you're paying. You have to understand what you're getting for it. There is conflict everywhere ... It's a free market. You have to deal with a breadth of issues."
Joining Ryan in advocating allowing brokers to profit from the commission structures tolerated by the marketplace was Gallagher, grandson of Arthur J. Gallagher, founder of Arthur J. Gallagher & Co.
Greedy brokers neglect clients at their peril, he said. Should a client find out, the broker will lose that trust and the client will find another broker.
Gallagher, whose firm generates 87 percent of its brokerage revenue from commissions, also said that clients often have a good idea of what a broker makes anyway.
"You stop a middle-market client who's the CEO or the CFO of a nice contracted risk and say, 'What do you think you're paying your broker?' "He said."In fact, most of the time they'll estimate more than our actual transaction commission including contingent."
In statements published on the firm's Web site, Gallagher says its brokers receive "usual and customary brokerage and fees (and occasionally fees in addition to commissions) for its services." There is no mention of disavowing contingent commissions of any sort. About 92 percent to 95 percent of his firm's clients prefer to pay brokers on commission, Gallagher also noted. He, too, appears to favor disclosure as opposed to banning contingent commissions.
Commercial insurance buyers who perked up in hopes that their brokers would speak with one voice were disappointed.
It was left to Martin Hughes, a former salesman before rising to the top spot at HUB International, who shut down any hopes that commercial buyers would even get a pricing break. Hughes flat-out noted that any reform of the commission structure would not end up in the pockets of insurance policy buyers.
Buyers, he said, most likely would even have to pay more "Clearly if you look at the returns of public brokers they are not strong enough today to support having that (contingent commission) income just disappear so the cost of insurance is not going to go down because of this," he said. "You as an insurance company are either going to have to pay more in commission, or you as clients are going to have to pay more in fees. It's just not an industry that can afford to take that kind of a massive hit without recouping those costs somewhere else."
There was one issue on which all the brokerage chieftains could agree, and it was this: The insurance brokerage industry was far better off without regulators breathing down their necks.
Even Cherkasky, the former state regulator, said keeping federal regulators out of the insurance brokerage business would benefit everyone in the long run.
"What does federal regulation ever do positive for any industry?" he said.
a former reporter, is managing editor of Risk & Insurance®.
June 1, 2005
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