Brokers Worry Investigations, Changes to Commission Structure May Harm Industry

Execs Voice Concerns About Overall Business, Impact on Small & Medium Brokers

In Combination of Survey Data and Volunteered Comments

New York, December 14, 2004 – New research from Advisen Ltd. has found commercial insurance brokers worry that industry changes resulting from various investigations into contingent commissions and anti-competitive practices will create financial burdens for both clients and brokers and potentially stifle the very competition that the changes are supposed to foster.

The current climate among brokers was captured in a series of informal questions and anonymous comments solicited by Advisen last month. Advisen queried senior brokerage professionals, predominantly executives and the most senior managers, asking a number of questions surrounding the current investigations into anti-competitive practices. Advisen also invited these executives to offer written comments.

Both the survey responses and the written comments portray the brokerage industry as reluctant to scrap the entire contingent commission structure, fearing smaller brokers who rely on these commissions — but lack the market leverage to abuse them – will suffer greatly from lost revenue and ultimately may be forced out of the market.

“Brokers see a new industry dynamic emerging from the investigations, including a more open transaction process and a more hands-on approach from many clients,” said David K. Bradford, executive vice president of Advisen. “In many of the comments we received, respondents deeply resent the stain on the entire industry resulting from current investigations and strongly assert that they act in the best interest of their clients, rejecting the notion that contingent commission agreements influence their choice of carriers.”

A clear majority acknowledged that the investigation of these and other practices will force some change in the industry. Nearly 77 percent of the respondents said they anticipated higher transparency would be required in the industry and almost all the respondents believe state regulators will require greater disclosure.

In their responses, most brokers predicted that changes arising from the current investigations would translate into an increase in the total cost of risk for clients or that the total cost would at best stay about the same. The brokerage executives also predicted that their own revenues would either decrease or stay the same.

The most pointed responses about the industry’s future were found in the written commentary in which brokers lamented the impact of the contingent commission controversy on the broader market.

The following is a selection of comments Advisen received from various brokers:

  • “As a regional broker, we feel that the arrogant behavior of some people at the very largest brokers and insurers damages everyone and not just in the pocketbook…but in reputation.”
  • “Contingent income was not a conflict for 99.9 percent of insurance brokers in the country who always strive to serve their clients’ needs.”
  • “I think there is an unintended consequence – less competition. The smaller brokers and agents will be driven out of business if they lose contingent income.”
  • “My first reaction, as the person that manages profit sharing and contingencies for our agency, is that this is a complete overreaction and a “lumping” of unrelated issues – i.e. linking bid rigging, an unheard-of practice, with legitimate management of revenue streams. We try to use contingencies and profit sharing to build stronger relationships with carriers for the benefit of our customers.”

“By asking brokers for written comments, we were able to gain real insight into their concerns about the controversy and understand where they think the industry will go from here,” said Mr. Bradford. “The controversy is clearly going to change the industry, but the brokers who participated in our research believe that contingent commissions are a valid and important source of income and the commissions do not detract from most brokers’ obligation to act in the client’s best interest.”

The research was conducted over a two-day period starting in November. Nearly 135 individuals with senior management titles responded to a web-based survey. Among the respondents, 64 percent were members of top 100 commercial insurance brokers, with nearly half of the respondents representing the four largest brokers.

About Advisen

Advisen Ltd. provides insight into underwriting, marketing and purchasing commercial insurance. Advisen’s web-based workstation incorporates real-time analytics and research on over 1.5 million companies and 70 industries. Advisen currently serves nearly 350 leading commercial insurers, insurance brokers, risk management departments of major corporations, and other related organizations. Proprietary offerings of the Advisen service include Benchmarking, Custom Templates for Company Work-ups, Company and Industry Research, Loss Analysis, Management Portfolio Analysis and Policy Comparisons.