According to a recent e-mail survey, conducted by the Federation of European Risk Management Associations (FERMA), risk managers and their associations have long questioned how brokers are compensated.
FERMA queried the members of its Forum 2005 committee to find out how national associations have reacted to revelations from the inquiries in the United States into broker remuneration.
They asked the following questions:
— How concerned are you/members of your association about the payment of contingent commissions or market service agreements for brokers, either for volume or profitability, in your country?
— How concerned are you about possible collusion between brokers and insurers to set prices that are higher than they should be?
— Do you feel that any deliberate practices by brokers have affected the cost of your insurance adversely?
— Has your association taken any action? Does it plan any action? If so, what is it?
— Do brokers place most large programmes in your country or does a lot of business go directly to insurers? Do SMEs in your country generally go directly to insurers or use an independent broker?
— How important do you believe brokers are in getting the best terms and conditions for your coverage?
They got answers from the risk management associations in Belgium, France, Germany, Italy, Portugal, Switzerland, the Netherlands and the U.K., which they have released in summary form.
Concern and action
Serge Marchand of the Belgian risk management association BELRIM responded: “We are very concerned and for the last ten years we have requested full transparency about brokers’ remuneration, but without too much success. The administrative costs of insurance transactions are far too high and the only way of reducing them is to have a clear understanding of the role of everyone, to know the added value and the precise role of every one. Then a fair compensation can be fixed.”
The FERMA bulletin reported that “BELRIM is working on a standardized declaration to be signed by brokers by which they agree to not accept contingent commissions and to declare any other kind of remuneration / compensation which they would receive linked directly or indirectly with the insured risks.”
It also confirmed that the UK risk management association, AIRMIC, “began inquiring into the way brokers were paid about six years ago after one of its members, a risk manager with a multinational company, complained that it was impossible to identify how and what the broker was being paid. AIRMIC has now set up a task force, which plans to produce draft disclosure standards for discussion with the insurance market this month.”
In addition AIRMIC is meeting the Financial Services Authority (FSA) and British Insurance Brokers Association (BIBA). According to Geoffrey Johnson, who is acting as secretary to the working group, “AIRMIC is particularly keen to assist commercial insurance buyers who are not professional risk managers and who, therefore, depend heavily on advice from their brokers.”
Shortly after New York State Attorney General Eliot Spitzer released his allegation, AIRMIC surveyed some 200 of its members, and found that 91 percent were concerned about the implications of the allegations, with 54 percent saying their boards have also expressed concern. “All the respondents considered it important to have full disclosure of how much of their insurance payments go to the broker and two-thirds said they would require greater disclosure from their brokers on renewal,” said the bulletin.
The French risk management association, AMRAE, “has already had meetings with brokers and will do so again with the aim of preventing negative developments,” according to Michel Yarhi, its representative to FERMA. He also noted that AMRAE has sent a bulletin to all its members concerning broker payments. It notes that an accord was signed three or four years ago with brokers’ representatives “to ensure that the broker acted honestly and in the interest of the assureds.”
Maurizo Castelli of the Italian risk management association ANRA, however, is worried about another type of fallout from the investigations – regulatory overreaction. “My main concern in respect of the USA right now is that the legislators will over-react to the Spitzer crisis, thus resulting in a wave of regulations making it extremely difficult to deal with insurance needs there,” he commented. “Insurance is still and should, in my opinion, continue to be a business of personal relationships where mutual knowledge and trust play a key role, and the insurance buying process cannot be reduced to a public bid process fully regulated by law.”
Respondents from other countries expressed different degrees of alarm over the investigations, depending on their particular circumstances. Goetz Deecke of the Swiss risk management association SIRM stated: “We are more shocked than concerned. In Switzerland, ‘the family’ of buyers, brokers and insurers is too small; these shady practices would be known very quickly.”
Castelli observed that most brokers are remunerated on a commission basis, and that the “level of remuneration and the relevant practices are well known and recent events are unlikely to have a significant immediate impact.” However, he added that he thought the “idea that the average level of remuneration of most brokers was too high was rising in the country well before Spitzer. ANRA had a round table of brokers at its biannual conference last June in Parma where the issue of the brokerage role and the level of remuneration was raised.”
Ralf Oelssner of DVS, one of Germany’s two risk management associations, commented that in Germany extra commissions are not publicised. “They do, however, exist,” he said. “Even smaller brokers have been known to ask for them, for example, for changing a lead or for changing the insurer. Large brokers have approached insurers about contingent commissions.”
In Portugal where the FERMA Forum and IFRIMA meeting will take place, however, risk managers do not see broker payments as an issue, according to José Manuel Dias Da Fonseca of the association APOGERIS. Portuguese risk managers are most concerned about the lack of choice of insurers, especially as further proposed consolidation goes ahead. It could result in one company controlling 80 percent of the country’s industrial insurance market.
From the survey’s results, it appears that “no FERMA representatives indicated that there is evidence in Europe of price collusion between brokers and insurers, but risk managers are clearly unhappy about the revelations from the United States.
As AMRAE’s Yarhi commented, “this point is the most difficult to deal with because it brings into issue our relationship of confidence with the broker. It is fraud.”
Den Dekker from the Netherlands pointed out that “if it happens in the USA, then why not in Europe? Our goal is to create a NARIM (or FERMA) standard whereby brokers and insurers will have to answer questions regarding these issues.”
He added: “We do not have any proof of that the cost of insurance has been affected, but some members have asked their brokers for clarification on this issue. “
Marchand of BELRIM, voiced the thoughts of many FERMA members, indicating, “We are also very concerned about this. Such practice must be totally banned and should attract high fines in case of subsequent offence. If what people say is true, the insurance cost must have been affected but the judicial inquiries are not yet finished.”
Castelli put the situation in a larger perspective. “Although obviously the practice itself is extremely concerning, I think it has been limited to a few isolated individuals,” he stated. “On the other hand, it is obvious that this question brings us back to the very old issue of the conflict of interest for brokers, particularly when they are remunerated on a commission basis.”
In Germany, the widespread existence of captive brokers – all the biggest firms have them – protects against such abuses, according to Oelssner. In general terms, however, he described himself as “very concerned as it is tantamount to the elimination of competition to say the least. If the prices are higher than they could be, call it fraud.”
Harry Daugird, of Germany’s other risk management association BfV, also emphasised the value of the captive broker, stating: “A well structured, captive broker based risk management system is likely to be an effective tool against such misbehaviour. By that I mean that the captive broker is fully in charge, both as a placing and coordinating broker, responsible for all strategic decisions. A third party broker who is reduced to a mere service provider can do no harm!”
About three years ago the executive committee of the BfV in a paper, which is publicly available, drew attention to the issue of contingent commissions and emphasised the key role that the captive broker can play to prevent this unethical conduct.
FERMA’s report concludes: “In Europe, nevertheless, risk managers do not want to savage brokers whom they feel play an important role. Den Dekker says that thanks to their knowledge and networks brokers are very important in getting the best terms and conditions for coverage.”
Belgium’s Marchand took a similar view, but added, “However, direct contacts between insurers and insureds are very important.” Deecke in Switzerland expressed the same sentiment, stressing that “brokers are useful but the risk manager still has to know through his direct contacts with insurers and others what is possible or not in the market to challenge his broker.”
In Germany, brokers are less important for large industrial companies, according to Oelssner but it may be different for international or global programmes and it is definitely different for small and medium sized companies.
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