Big brokers’ remuneration practices slip back warns JLT’s CEO

Speaking at the announcement of the broker’s 2010 preliminary results Mr Burke also said the insurance market was at a ‘flexion’ point and may begin to harden as early as the end of this year. JLT announced that total revenue for the last financial year was up 21% on 2009 to £746.3m. This was achieved through organic growth of 7% across its business and on the back of particularly high growth in Asia and Latin America. At the results briefing Mr Burke expressed concern that the big three brokers—Aon, Marsh and Willis—are returning to the remuneration models so heavily criticised by the then New York Attorney General Elliott Spitzer in 2004. hideThis includes the payment of contingent commissions, or overriders, whereby insurers pay fees to brokers if a certain volume of business is steered their way. “We are seeing a tactic used exactly as it was pre-Spitzer—whereby they quote for nil fees in a particular year to win business but we know they have financial arrangements, contingent commissions and profit shares in place that are going to remunerate them on that account in the year in question,” said Mr Burke. This clearly is not in the interest of the insurance buyer, added Mr Burke, who said he would not be surprised if certain brokers find themselves with regulatory challenges once again. JLT would be ‘very supportive’ of a move that would see all of the broker market move to net terms, said Mr Burke, whereby no commissions are paid and brokers negotiate their fee directly with clients. “We would sign up tomorrow to such a regime,” he declared. Mr Burke believes that his firm would be the beneficiaries of such a move and that the biggest brokerswould not be able to compete with JLT on net rates. JLT roughly have a 50–50 split between fees and commissions for services and less than 1% of its overall earnings are down to contingent commissions. All of its remuneration is fully transparent, the broker said. The CEO said that JLT deliberately avoid contingent commissions and do not think the way in which many fellow brokers conduct their relationship with insurers is appropriate. But he added that ultimately it is up to underwriters and buyers to speak for themselves on this issue. He also questioned the ‘unhealthy’ influence that Aon, Marsh and Willis have on the market. “We are in the unhealthy situation where the big two and half brokers have an unhealthy influence over the market…Lloyd’s recognise that and want greater diversification,” Mr Burke said. At the results briefing Mr Burke also made it clear that JLT believe the insurance market is at a turning point and could begin to harden by the end of 2011. The current undisciplined pricing by underwriters, poor investment returns and insurer results propped up by reserve releases are all signs that things cannot go on as they are, he warned. “So I sense that the balance sheets of insurers cannot take too much more strain. Together with the fact that we see clear evidence that people are writing for market share these are key indicators that the market may be about to turn,” he said. Whilst it may well be that a huge catastrophe loss will be the catalysts for a change in pricing, Mr Burke senses that increased underwriter discipline may ultimately shift the market this time around. A key reason why the broker doubts a single event will change the market is the increased amounts of capital in the market today and the speed at which it can be distributed. Indeed he believes this phenomenon may have put an end to the traditional hard and soft market cycle. Mr Burke pointed to the state of the market following the $70bn Katrina loss in 2005 that saw the market harden in 2006, but return to soft conditions as early as 2007. And he warned insurers that this new found capital structure may mean that they cannot rely on a prolonged hard market to recover losses from a large event. “Capital flows very much more easily into the market and deploys itself more easily…I just do not see that those underwriters that get hurt will be afforded the time to recover. I do not think they can sit there and say it will be alright because we will have two to four years of hard market to recover as we do not think that that will transpire,” he said. JLT’s increased revenue and organic growth figures in 2010 benefited from the contribution from high-growth economies such as Asia and Latin America, which witnessed organic growth of 20% and 25% respectively, Underlying trading profit was up 25% to £129.9m, an increase of 9% at constant rate of exchange. "I am pleased to be able to present a strong set of results despite challenging industry conditions,” said Mr Burke. “We have a strong headwind despite low consumer demand, low business confidence, rising unemployment, government austerity measures and most crucially the intense broker and market competition.” He pointed to figures since 2008, which show organic growth of 21%, as proof of the company’s growing presence in the broker market. The employee benefit side of the business increased revenues of 46%, or a year-on-year increase of 4%, in 2010. It now accounts for 18% of the group’s revenues. Duncan Howarth, international chairman of JLT’s Employee Benefit Division, said that it is increasingly important that firms use employee benefits to attract and maintain talent. There is a broad range of benefits on offer and companies need to be more flexible in terms of what they offer to employees, he continued. “Employees now expect to be able to select which benefits are most appropriate to them, often through online resources,” he advised. JLT increased its European presence last July when it announced the formation of exclusive partnerships with brokers Siaci St Honore (S2H) in France, Austrian-based GrECo and Germany-based Ecclesia. The deal saw JLT take a 20% stake in GrECo and maintain a 20% stake in S2H. That relationship sits at the core of JLT’s part-owned, part joint venture and member non-owned global network, said Mark Drummond-Brady, international chairman of JLT’s risk and insurance group. The network allows JLT to export its specialty skills, structuring skills and syndication capabilities to allow its partners to win business in western Europe and then place insurance in their domestic markets. In eastern Europe, where the markets are more shallow and there is more dependence on the facultative reinsurance routes back into the London and international markets, JLT plays a more hands-on role, Mr Drummond-Brady said.

Big brokers’ remuneration practices slip back warns JLT’s CEO

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