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To be sure, New York Attorney General Eliot Spitzer's probe has companies of all sizes reaching out to the independent or regional brokers, in many cases for the first time. "There's no doubt about it: Spitzer's probe is an opportunity for us," says Richard C. Hylant, president of independent Hylant Group. "We've been contacted by many risk managers or consultants representing them, customers we've never actively courted, and a number outside of our Upper Midwest footprint."

"Nationals are no longer the safer companies," says Marshall Sosne, CFO at privately-held

Hylant and a former Willis client. "There's much more turmoil at the largest companies, and, as with Arthur Andersen, you have to ask if they're going to be there for the long haul."

The risk management community, brokers say, isn't alone in pushing the new interest. Far more important, they say, may be questions asked by boards and audit committees about broker relationships--a subject that rarely, if ever, has captured their interest in the past.

"The opportunity for the independents is large--and not because risk managers are initiating contact on their own," notes Henry Good, the former corporate risk manager for chemicals manufacturer Rohm and Haas and now a risk management consultant for Redwood City,

Calif.-based broker ABD Insurance and Financial Services. "All of a sudden treasurers, CFOs and audit committees have to understand insurance. Because of Spitzer, if you're a CFO you're going to be asking, 'Are we dealing with the companies under investigation? Are we paying too much?' And that starts the process."

Of course, with Spitzer's investigation, a number of companies have been looking into whether their brokers charge contingency fees. They are moving aggressively to protect themselves in the aftermath, working only with brokers who forgo those fees in writing. "There's an opportunity for regional and smaller brokers because there's much more transparency," says Randy Triplett, director of risk management at American Greetings in Cleveland, who's been doing business with Hylant for more than three years and still maintains a relationship with bruised giant Marsh. "Because they're smaller, you can see how they're doing their business. It's much easier to know what's going on with your account."

THE ICING ON THE CAKE

Regardless of who's pushing for a re-examination of broker relations internally, it's clear that the new business is icing on the cake for independents large and small. Even if individual brokers pick up no business whatsoever as a result of Spitzer, the independent community is thriving--and has been for some time. Indeed, a bevy of multinationals has been doing business with the independents for years, helping to smash age-old presumptions about them--namely, that it's not worth doing business with them because they don't have the international offices and reach of the giants New York-based Marsh, Chicago-based Aon and London-based Willis; can't get the same or better pricing than these three giants do from insurers; and don't have the same close relationships with insurers that lead to speedy responses and greater flexibility in contract negotiations.

"Some may question whether the independents have the clout and leverage to stand at the table with the largest insurers," says Hector Mastrapa, vice president of insurance at Bethesda, Md.-based Marriott International, which does business with independents Beecher Carlson in Atlanta and Early, Cassidy & Schilling in Rockville, Md., as well as with Marsh and Willis. "We have found that they do.

"The independents have just as strong relationships with large insurers as our larger brokers, and they work extensively with them," says Mastrapa. "In addition, accounts like Marriott tend to draw the attention of key markets anyway. So size and clout haven't been an issue for us, and they've been able to deliver for us."

What's the primary reason both multinationals and midsize companies have been seeking out the independents? Service. "They're responsive to my needs instead of what they want to sell me," says Dennis Bennice, president of Dana Risk Management Services Inc., the risk management arm of Toledo, Ohio-based auto parts company Dana Corp., which has worked with Hylant Group for close to two decades. "They take time to understand my business, and they don't blow smoke my way."

A common beef: Usually the "Big Three" deliver on the front end--during the "procurement process"--but fail to deliver with back-office operations, both in terms of quick turnaround and accuracy.

"If you can achieve similar procurement results from either a very large or smaller independent, yet the larger broker doesn't perform well on back-end service, why should I continue to spend the equivalent or even larger fees to engage the larger broker?" asks Gary F. Kilburg, assistant treasurer of risk management at Benton Harbor, Mich.-based Whirlpool Corp., which worked with Marsh exclusively until July of last year, and now gives about half its business combined to independents ADB and Beecher Carlson.

Adds Bianca Miller, director of corporate treasury at Santa Clara, Calif.-based Yahoo! Inc., which brought in ABD about 15 months ago to replace one of its Big Three brokers, "This isn't a question of big versus small, it's a question of mediocrity versus excellence and having higher standards."

Yahoo! has no risk management department of its own and uses ABD almost as an outsourced risk management department (although it works with Aon as well and says it's pleased). "They don't wait for us to call them," Miller says. "They call us whenever they come up with a new idea or a thought about our current risk management practices. This is high praise for them. They'd have an office here if we allowed them to."

Beyond service, there's a variety of reasons why corporations of all sizes are turning to the independent broker firms.

Key among them is that many independents are privately held. "Because they're not public companies, they don't have to worry about analysts and stock brokers," says John Matthews, corporate director of risk management at Harrah's Entertainment Inc. in Memphis, which works with Beecher Carlson, Memphis-based Menard Gates and Mathis, and Palmer & Cay. "They're not always looking to increase the top line and decrease expenses. They're focused on giving the customer good service rather than the stock price."

And although the independents traditionally have been shunned by multinationals because they lack a bricks-and-mortar network of international offices, that's less and less the case because of the improved technology that gives the independents the ability to share data worldwide.

Today the independents can call on the services of internationally based broker networks that will service their client needs at a fraction of the cost of owning their own offices abroad. At least four such networks exist to help the independents and their clients.

Beyond these issues, corporations are impressed by the caliber of talent the independents are

attracting (usually from the Big Three) and are pleased that they find themselves dealing with the same brokerage representative year after year, often the same individual initially signed to the account.

"Beecher has been able to hire and to a great extent retrain high caliber people within their groups. We are able to know our key people within their network on a frequently more intimate basis because of its smaller size and they seem to know us very well. And our access to these people tends to be very good," says Marriott's Mastrapa.

Not all former employees get offers from the independents, of course. Richard Hylant notes, for instance, that after Marsh let 13 of its 19 Toledo-based employees go, he interviewed almost all of them and has made an offer to only one candidate.

"I was really looking forward to working with a few of them, but they just wouldn't fit into how we do things," he says, "and some of them even admitted it."

BIG THREE STILL DELIVER

But make no mistake. Marsh, Aon and Willis, still have massive clout in the marketplace.

Of the $27 billion in global brokerage revenue in 2002, Marsh had a 31 percent market share, Aon a 23 percent market share, and Willis a 7 percent market share, according to Swiss Re. Thus, 61 percent of the global brokering market was controlled by three firms.

Losing that kind of market share isn't about to happen anytime soon because of a temporary scandal. Marsh's clients, says the broker's new CEO, Michael G. Cherkasky, benefit from the firm's ability to deliver value and access to capital, particularly for large and middlemarket corporations.

"We think we have services people like and value," he said, speaking at the annual gathering of risk and insurance managers in Philadelphia earlier this year. "It's all about value."

Clients benefit from his firm's ability to provide a suite of services ranging from risk assessment to risk management, risk mitigation to risk transfer, and even to risk management information systems technology.

While the independents may be more focused on services, they are also limited in their ability to handle complex risks, according to the brokerage leaders.

"If you are talking about a large midmarket client with risk managers or a large corporate multinational, you're talking about complex risks that need the intellectual capital to be able to help manage those risks," says Patrick G. Ryan, Aon's executive chairman. "The scale of those risks has changed dramatically. The complexity has changed dramatically."

The sign that the big brokers are still a force to be reckoned with is that many of Marsh's clients have decided to stay with the company. Many could have abandoned the company in the wake of its bidrigging scandal, and even sunk the firm, Cherkasky also says.

In some cases, clients have shifted only a percentage of their business out of Marsh to the independents, thus retaining a portion of their book of business with the giant brokerage firm.

CALCULATED MOVES

Leaving a large broker after many years is never easy.

Corporate executives looking for a new broker point out that their moves to the independents aren't made lightly and often involve a rigorous request for proposal process.

Consider Framingham, Mass. - based Bose Corp., a company wellknown for sound excellence in its home entertainment and automobile systems. When searching for a brokerage firm, the privately-held company insisted that its broker adopt the management system--the philosophy--employed by Bose. "We employ several types of management systems to achieve our performance objectives," says Jack Bailey, manager of environment, safety and risk and an Acordia client. "We're ISO- and QS-certified and use Lean Six- Sigma as part of our quality and management regimens. We plan for change, growth and continual improvement."

Bailey calls "continual improvement" a key driver of the company.

Acordia, which was brought on board in March 2003, "was comfortable with our approach and offered suggestions for new ways to handle our business," says Bailey. "As a result, it suggested holding monthly improvement meetings to cover claims reviews and our risk management status, and take a look at new developments or new products. These meetings have been very instrumental to us in keeping up with a changing marketplace and with developing exposures as we grow our business."

Bailey says that Acordia has also worked actively with Bose "to lower our risk management costs. We know what we are paying for with Acordia and are satisfied with their pricing policies. It's easier now to determine the value of services provided."

Now, says Bailey, "we won't be surprised. That's what we're looking for and that's what we think we're getting."

Some companies are willing to pay what in effect are bonuses for a job well done by their brokers. That's the case at Marriott. It is also the case with Plano, Texas-based Perot Systems, who works exclusively with brokerage house Palmer & Cay, and Whirlpool, among others, where the goal is to make sure that, if it awards a bonus, part of it actually ends up in the paychecks of the broker staff working on its behalf.

"The broker's putting some of his fee at risk with our fee structure, but they know if they perform well we will follow through, not only with a base fee but with a bonus based on our specifications," says Whirlpool's Kilburg. "Particularly with smaller brokers, it gets their attention. We just don't believe the largest brokers' internal compensation systems allow such an incentive to get directly to the (individuals) on the brokerage staff for superior performance on our work."

What have been the results to date? "Both of our independents have gotten their bonuses this year," says Kilburg. "On the other hand, Marsh in the past has received such a bonus infrequently."

Ultimately many risk managers see the Spitzer investigation--and the resulting questions asked along with a move to the independents--as benefiting the profession itself, protecting their companies and shareholders.

"Risk managers need to take responsibility for their costs associated with broker revenue and manage the cost of risk," says Dana's Bennice. "Not withstanding being lied to or deceived, risk managers in part caused these current problems. They need to take responsibility and fix them, and are doing just that."

LAWRENCE RICHTER QUINN, a Washington D.C.-based freelance writer, is a regular contributor to Risk & Insurance®.

July 1, 2005

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