Busting the Brokers

Eliot Spitzer's latest investigation has companies taking a hard look at their insurance programs.

Ironically, the increased levels of skepticism resulting from Spitzer’s investigation ultimately could lead risk managers to put even more faith in their brokers, says Richard Betterley, president of Betterley Risk Consultants. Because they are likely to be less trustful of the industry in general, he says, insurance buyers may become even more loyal to brokers that can earn their trust. “In some ways,” says Betterley, “it may become even more of a personal relationship business.”

Randy Myers is a contributing editor of CFO.

Following the Money

Apart from individual instances of bid-rigging, it may never be possible to know just how much the insurance shenanigans alleged by New York State Attorney General Eliot Spitzer might have cost corporate policyholders. In part, that’s because the value of an insurance policy is determined not just by its price but also by a range of ancillary factors, including the strength of the insurer, its claims-handling ability, and the breadth of its coverage. “On any given day, for many lines of insurance at any given company, you can probably find a lower bid than that which is on the table, because there are so many carriers willing to bid,” observes Peter Rousmaniere, an independent risk and insurance consultant in Woodstock, Vermont.

Too, the use of the contingent commissions denounced by Spitzer had become so widespread that it’s difficult to gauge the degree to which they might have stifled competition. Property-and-casualty insurers in the United States paid out $3.7 billion that way last year, according to securities analysts at Morgan Stanley, an amount equal to 1 percent of industry premiums. “Even when this industry ran more like a cartel, before there were antitrust laws and before it was considered interstate trade, people competed,” says David Schiff, editor of the iconoclastic Schiff’s Insurance Observer and a frequent industry critic. “It’s too big a marketplace to really, really rig.”

Although Marsh & McLennan Cos. and the nation’s other big insurance brokers pledged to stop taking contingent commissions in the weeks after Spitzer filed his lawsuit, insurance experts say corporate buyers shouldn’t expect a dollar-for-dollar reduction in their costs as a consequence. More likely, they say, brokers will offset their lost income by charging higher fees or by negotiating higher regular commissions from insurance companies on the policies they sell. What corporate buyers can expect, industry observers agree, is greater pricing transparency, already promised by Marsh and other big brokers. Frank Borelli, who retired as CFO of Marsh at the end of 1999, says buyers must insist that they be told exactly which insurance companies their brokers have solicited; how the resulting proposals differed; and why, after analyzing them, their brokers recommended a particular insurer. —R.M.

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