RIMS 2005 Conference: Revolution or Rebellion?

To say the Risk & Insurance Management Society (RIMS) conference, which was recently held in Philadelphia, started with a bang is an understatement. At the conference’s opening meeting, Willis Group CEO Joe Plumeri lit a fire under the insurance industry in the wake of recent scandals over broker compensation and other industry practices.

The industry should take this controversy and use it as an opportunity for “healthy self-examination”, Plumeri says. The industry needs to develop a new business model based on transparency, innovation and client advocacy. Willis was the first brokerage to discontinue accepting contingent commissions when they came under investigation by New York attorney general Eliot Spitzer last year. Plumeri says all brokers should follow the lead taken by his firm. He says such commissions are “inconsistent with the principle of client advocacy”, stressing, “it must be 100% clear who the broker works for”. As such, payments should come from the client, a system he says will make brokers more valuable and encourage them to work harder for their fees.

In the same vein, he adds, the industry must address the issues of contract certainty and more efficient claims payment to better serve its clients and avoid insurance becoming a commodity. And, the industry’s new business model should include tighter internal controls and disclosure standards, and an emphasis on delivering solutions, not just products, he stresses.

OPPOSING VIEWPOINTS

The CEOs of the other two largest brokerages gave differing views on what the future of intermediary compensation should look like at RIMS’ keynote panel discussion. Marsh CEO Michael Cherkasky says all brokers should discontinue accepting contingent commissions, noting “contingencies are inherently a problem” in terms of the perception of conflict of interest. However, recently retired Aon CEO Patrick Ryan, who remains the company’s chairman, says that while his brokerage has discontinued accepting such commissions, others would have to make their own decisions. “That’s up to them, it’s a free market. It’s between you [risk managers] and the people you do business with [brokers].” Ryan notes that, when it comes to basic commissions, different insurers pay different rates already. “We’re not going to have standardized commissions [across carriers],” he predicts.

Cherkasky countered this argument, saying the appearance of a conflict of interest will continue if commission terms are not the same amongst carriers. “You can’t have a market where someone pays you 8% and someone [else] pays you 10%,” he argues.

Speaking from a risk manager’s perspective, Sun Life Financial’s assistant vice president of risk management, Susan Meltzer, says transparency and disclosure are about more than contingent commissions. Meltzer observes that “transparency is not about contingent commissions, it’s about transparency of all ancillary income [received by the broker].” She says the industry’s problems arose from an “aura of secrecy” around brokers and insurers Meltzer-adds that this extends to the secrecy surrounding reinsurance transactions undertaken by insurers, directly impact buyers because it speaks to the ultimate ability of companies to pay claims. Meltzer also challenged the broker leaders to get their own organizations on the path of enterprise risk management, noting, “you missed the most significant risk facing your [own] companies”.

Both Ryan and Cherkasky were in agreement on the need to deal with the issue of compensation within the industry, rather than through greater, outside regulation. “What does federal regulation ever do positively for any industry?” Cherkasky challenges.

Meltzer notes that risk managers need to take responsibility for their role with respect to ensuring disclosure takes place and to better managing their relationships with brokers as they would manage any other outsourced service on behalf of their organizations. After RIMS published its guidance on contingent commissions more than five years ago, she says few risk managers followed through with demands for disclosure and many of those who did eventually faced resistance on the part of brokers providing the information.

STRONG WARNING

RIMS president Ellen Vinck came out with the strongest words on the current controversy surrounding broker remuneration and how risk managers must address the issues. Vinck challenged risk managers not to leave the solutions singly to brokers or regulators. She points to recent media surveys which show a significant number of risk managers do not know how they are going to respond to the broker remuneration controversy, including whether they will remain with their current intermediary or not. “Don’t sit back, don’t be quiet anymore,” she emphasizes. Furthermore, Vinck admonished the risk management profession for not taking action following RIMS guidance on compensation disclosure in the late 1990s, noting that even today too many risk managers are not demanding brokers be accountable for their compensation. “RIMS can’t do this for you. You are the risk managers, the insurance professionals, the insurance buyers, the clients. You need to know what you are going to do.”

Vinck called for an end to controversial contingent commissions. “There is not one service model…but I do believe there should be one model for compensation. This means “the brokers get paid from one source and that should be us, your clients. We want to make sure our interests are put first.”

Vinck also expresses dismay over the lack of dialogue taking place with insurers. “What are the carriers thinking?” she asks. “Their silence has been deafening.” As such, she warns that, if risk managers, brokers and insurers do not find some consensus on the issue soon, regulators will step in and fill the void. “We need to be working on this now so we don’t get something we can’t live with in the future.”

HIGHER DEMANDS

Insurers are having to respond to the same calls for transparency as brokers in the current environment. Insurance leaders interviewed by CU at the conference say there is an overall environment where utmost transparency and good corporate governance is a necessity.

“All the risk managers want much more transparency,” says Perry Brazeau, manager of Canadian operations at FM Global. This means risk managers want to meet face-to-face with underwriter and to know what governance controls insurers have in place. They also have a keen interest in insurer security and specifically are asking questions about the reinsurance programs insurers have in place.

Insurers are investing significantly in compliance as well, to meet and hopefully exceed new regulatory demands, notes Urs Uhlmann, senior vice president of Zurich Canada. Companies are putting forth “significant effort in assessing the way we do business and putting even more controls in place, to show that we manage risk as well as we expect our customers to. There is always more you can do than simply meet regulations.”

The London market is also dealing with its own efforts to reform business practices, both as a result of oncoming expectations by the U.K. Financial Services Authority (FSA) and also rising customer demands in terms of contract certainty and claims efficiency. The significant “revamping” of business processes in the London market will lead to “greater efficiency and more importantly greater certainty”, says Julian James, director of worldwide markets for Lloyd’s of London. He says the lack of certainty around contracts has been an accepted industry practice for far too long.

Brazeau agrees there is increased emphasis on contract certainty and transforming business processes around insurance in light of the recent issues facing the industry. “Customers want to see that policy as quickly as possible.” In response, FM Global has invested heavily in technology and processes to ensure it issues at least 60% of its policies within 30 days, he adds. Furthermore, Bra zeau notes that clients are also confounded by the renewal process. They are asking “why is it the last week before the renewal when I get the terms and conditions?” Brazeau explains, “we need to change the process and talk to clients up front”.

UNDERWRITING EMPHASIS

With the spotlight focused on industry practices, the issue of pricing seemed to surprisingly fade from view at the RIMS conference. Insurers say they can ill afford to take their eye off of the issue or rate adequacy – despite heady financial reports coming from the industry. Insurers interviewed by CU concur that a lapse in underwriting discipline will cost the industry all that it has achieved in the past few years. “What we’ve been at great pains to point out…we’re under no illusions the greater challenge lies ahead if people don’t learn from the mistakes of the past,” says James. “If we get complacent, and indeed arrogant, we will throw away what we’ve gained in the past three or four years. Buyers want stability more than price.”

For 2005, Lloyd’s reported a drop in capacity, something James says is a “healthy trend” indicative of underwriters’ willingness to show restraint as prices soften. “You’re seeing early signs that people are reigning back, that’s a very positive step.”

“We will not write anything where we cannot get the right rate,” Uhlmann says of the strategy at Zurich. The insurer hopes industry leaders will stay true to their talk about the need to maintain discipline and not fall into a competitive struggle for top-line growth at the expense of rate adequacy, he adds. “We hope for some sense in the market and that people will ‘walk the talk’.”

However, there are discouraging price weakening signs in marketplace, specifically the increase in capacity in the directors’ and officers’ (D&O) market which Uhlmann finds “somewhat amazing” given the continued growth of claims due to litigation. He says companies must make the investment in the right tools and processes to be able to underwrite profitably on a risk-by-risk basis.

Brazeau says that research has become ever more crucial in the underwriting process, particularly in light of the inability of ‘off the shelf” risk modeling products to fully assess risks. But, he agrees that, overall, carriers are holding the line when it comes to pricing. And, he observes, risk managers have thus far been supportive in their responses to this underwriting discipline.

A Canadian moment of pride at RIMS: Past RIMS President’s Tony Bridger, Susan Meltzer, Nancy Chambers (immediate past) and Marc Darby.