Broking Solutions

Imperfect Solutions

There is a lot of history regarding the engagement of insurance brokers, and arguably no right or wrong approach. There are downsides to both commissions and fees. The Asian CEO has to work out which methodology works best for the organization and approach the engagement process with eyes wide open.

Against contingent commissions

Well over a decade ago a series of investigations triggered in part by New York Attorney General Eliot Spitzer were intended to ‘clean up’ the insurance industry. Contingent commissions were already common knowledge in some markets but unfortunately Spitzer took an evangelical approach to the whole issue. Spitzer himself came undone over investigations concerned with his personal life and the message for the insured got blurred along the way.

For a separate independent judicial viewpoint from the USA, the less colorful 2006 comments of Illinois Attorney General Lisa Madigan have been excerpted below.

"(Companies) sought and obtained huge payments from insurers in return for steering them enough business to meet secret threshold targets," Ms. Madigan said in the statement. "(Companies) never should have accepted these payments without fully and clearly disclosing that these targets and payments created a potential conflict of interest (with) its clients."

Citing interoffice memos and internal e-mails, Ms. Madigan said her investigations found that managers received personal bonuses when their branch offices helped hit contingent commission targets and that the brokerage accepted "hiring subsidies" from certain insurers. Under these undisclosed arrangements, some insurers would pay for the salaries of some brokers in return for insurance business.

Against Fees

Some brokers argue it is difficult to justify building a component into the fee structure that covers the possibility of handling a sizable claim within the insurance period.

Without naming names, a former Australian broker explained how for eight years, his company netted premiums and charged a fee-for-service on all classes of business in order to be upfront with clients before eventually reverting to a commission model.

“We weren’t sure we were doing ourselves a favor, or the client, as we questioned whether the income derived from charging fees was making enough money for us, and the client just looks at the bottom line anyway.” He said that netting premiums is more work, and every underwriter has a different way of netting. Being remunerated via commission guarantees income without headaches, whereas during the eight years of fee-for-service remuneration, clients were always seeking justification of fees and looking for discounts.

An Australian insurance industry analyst has been quoted as saying that “for many people, insurance remains a grudge purchase” and that calls for transparency, especially for retail clients, “make little sense when most are just looking for the cheapest price”.

Explaining to clients how fees are derived has been described as mission impossible. The same analyst noted “Consumers have no way of judging or understanding the value proposition that the broker offers in the fee,” he says. There will “always be a broker who will undervalue another broker’s fee”.

The fact remains that for some reason, it’s considered taboo to ask a sales person how much commission they receive for selling a particular product. The insurance industry is no different in this respect than from many other sectors. The insurance buyer should negotiate the compensation. Now, this is nothing new in most parts of the world, but for the CEO and his businesses in Asia, it’s rare. Why is it rare? Because of “trust” in the broker, businesses think its taboo to ask, and the insurance broker, making commission, is the one that has to volunteer the information. So, how do companies do it differently elsewhere? They ask.

One CEO Interview

When Joe Plumeri retired as the CEO of Willis, the insurance sector lost one of its most interesting ‘outsiders’ and buyers lost one of the greatest defenders of the insured. Joe was one of the most senior industry leaders prepared to scrutinize and question the contingent commission practices examined above. The following extracts are from a parting shot interview with the Financial Times from January 2013.

He was “astounded” corporate policyholders tolerate practices he said create a clear conflict of interest. A critic of so-called contingent commissions in the past, said the industry was “back to where it was before” a previous regulatory crackdown.

“Clients don’t seem to be rising up and yelling foul over these practices,” said Plumeri. “It blows my mind.”

“The whole industry can now accept contingent compensation as long as you tell clients that you take them – without necessarily enumerating exactly how much that is. I think that is crazy.”

“[Brokers] are getting paid if an insurance company makes more money, and the way you can make more money is if they don’t pay a claim. And your whole idea [as a broker] is to get your client’s claim paid. That’s a conflict – and it’s legal.”

Joe was nothing if not dramatic and that will be my lasting memory of the times I met him. For the full Joe Plumeri interview, please sign up to my Substack at https://open.substack.com/pub/tunstallasc/p/insurers-contingent-commissions-attacked

Next time, we will turn our attention to optimal insurance management for the corporate CEO and the introduction of more sophisticated tools such as captive insurance. There are good reasons why 95% of Fortune 500 companies have captives. It never ceases to amaze me that many large corporations in Asia still manage their risks with the same tools they started with when they were SMEs.?

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