Orims PD Day: Time for Solutions

Broker commissions should be history, and broker compensation should come from the client rather than the insurer, said the keynote speaker to Ontario Risk & Insurance Management Society (ORIMS) “Professional Development Day” held recently in Toronto.

Felix Kloman, editor of Risk Management Reports told the audience a “Pandora’s box” has been opened by New York Attorney General Eliot Spitzer, but that the issue of contingent commissions, and even the overall ethicality of commissions in general is a long-standing issue. He notes that he was writing back in the 1970s about the inappropriateness of insurers paying brokers. Now the issue is front and center, and the industry has been exposed as “a business riddled with conflict of interest”, he says.

To those who say the response to the controversy over whether contingent commissions represent a conflict of interest is simply to disclose those commissions, Kloman answers that this is “analogous to having the police chief in your town disclosing that he has mob connections”. While these commissions are not illegal, they are unethical in his view. “Any income from other than the client corrupts a relationship,” he states. “It is too late for disclosure, it is a Band-Aid…it is not enough.”

Kloman suggests that brokers in general are not corrupt, but that “if you place enough money in a line” someone will pick it up.

OPTING FOR FEES

Kloman suggests several changes which should be made in the industry, beginning with an end to all commissions, except for agents who say up-front they work for just one insurer. Agents would be required to disclose commissions directly in writing, he proposes.

Intermediaries should be paid fees calculated on an hourly basis, negotiated with the client, with Kloman noting, “fees are no guarantee of ethical behavior, but I submit they will take away much of the incentive.”

He also suggests clients should be allowed to place business directly with insurers if they wish to do so. And Kloman also feels federal regulation in the U.S. is an appropriate move, while on a global basis more regulatory harmony needs to exist.

However, Kloman does not hold out a great deal of hope that his suggestions will become industry standards. “Will the changes I suggest take place? Probably not.”

SPIRIT OF AGREEMENT

It was not surprising the broker compensation issue dominated the agenda for risk managers, but many attendees were looking for a path forward in their relationships with brokers rather than finger-pointing.

One tool both sides can use is the “Quality Improvement Process” created by RIMS, which can guide the creation of a broker service agreement (BSA). The industry has relied on a “spirit of agreement”, rather than formalized BSAs, which “are as popular as a trip to the dentist” to devise and review, says April Savchuk, senior manager of insurance and claims for Hudson’s Bay Co. Risk managers must ask themselves, when was the last time their BSA was reviewed, and was it even signed in the first place? “As the gatekeepers of risk within our own organizations, we are sometimes like the cobbler with holes in his own shoes,” she says of the need for risk managers to take control over their relationships with brokers. A BSA, she adds, should be about more than just fees and schedules, but also display “a mutual understanding of the risk” developed with input from both risk manager and broker.

There are several forces pointing to the need for BSAs to be in place and in force, including the increased importance placed on corporate governance, notes Garry McDonell, senior vice president with Aon Reed Stenhouse. Also, the Spitzer investigations have highlighted the absence of such formalized agreements within the industry. “They [investigators] have been going to both the brokers and the clients and they’re asking for these agreements and they’re shocked to find there aren’t any agreements,” he says.

JUST IN TIME

Many issues can be dealt with up-front through BSAs, but two of the most obvious are disclosure and timeliness. Savchuk notes that risk managers should ask themselves if their BSA contains a clear statement on disclosure expectations.

Perhaps as contentious an issue raised in recent months is that of timeliness, specifically when is it reasonable for risk managers to expect to receive policy documents. Savchuk notes that risk managers may have to ask themselves how big a priority timeliness is in relation to accuracy and, “what are you willing to make concessions on” in order to ensure accuracy.

McDonell adds that brokers want guidance on what their clients’ expectations are with respect to timeliness. “All we’re looking for is a definition of timely,” he says. But, the industry seems a long way from any consensus on what constitutes timely policy issuance. While McDonell says the policy should really be in the client’s hands the day it comes into effect, 30-days is probably a reasonable timeline. “In this era of corporate governance, I can’t believe people feel comfortable waiting 60, 90 days, one year.” This has become evident with new expectations being placed on the London market by the Financial Services Authority, “because often London would not be able to get the policy out [to the client] within the policy period”.

The World Trade Center coverage trials have highlighted the issue of contract certainty, with much of the legal wrangling spurred by the fact that the policies were not confirmed at the time the Trade Center towers were felled by terrorists on September 11, 2001. McDonell notes that the industry may see some guidance on the issue of timeliness coming out of the Trade Center trials.