RIMS ‘pleased’ with Marsh announcement on contingents as debate builds in Europe

Marsh announced last week that it had joined other big brokers in their decision not to pursue contingent commissions that are paid by insurers to brokers based upon the volume of business placed with them.

The broker will still take contingent commissions for its consumer-based affinity, sponsored program and personal lines businesses. It said that for these segments it will provide plain language disclosure that ‘meets or exceeds’ the recently introduced New York Insurance Department regulation No. 194.

Marsh said that it will also continue to collect enhanced commissions and fees for services from insurers for its core broking operations. “These forms of compensation, which are paid in consideration of Marsh’s provision of specific services to insurers, are fixed in advance of insurance transactions and are not related to volume, retention, growth or profitability,” stated the group.

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A spokesman for the group confirmed that the decision to cease contingent commissions for core broking activity does not, however, apply to Europe.

It is thought that Marsh and the other big brokers will hold fire on their European remuneration strategy as FERMA and BIPAR attempt to find a market solution and national regulators, such as the FSA in the U.K. and the European Commission, consider their next move as part of an ongoing review of the Insurance Mediation Directive (see April issue of Commercial Risk Europe for full details).

Marsh’s U.S. announcement followed the controversial ruling made in February by the New York State Insurance Department and Attorney General to allow Aon, Marsh and Willis to resume the acceptance of contingent commissions. This followed a ruling made last year by the Illinois state insurance department that released Arthur J. Gallagher from its agreement not to charge contingents.

This completed a full reversal of policy after the big brokers were fined and agreed to cease using contingent commissions in 2005 after former Attorney General Eliot Spitzer led a crusade against the practice to defend insurance buyers from conflicts of interest.

RIMS was not happy with the February U-turn in New York, but said that it had expected the move after the Illinois decision. “The investigations, admissions, and fines that led to the 2005 agreements banning such commissions prove that these practices can be, and were, manipulated at the expense of the insurance consumer. Without strong consumer protections in place, RIMS has strong reservations about a policy that permits contingent commissions again, and this development illustrates why RIMS so vigorously fought for a stronger rule,” said the association at the time.

The association had hoped that the lifting of the ban would be accompanied by strong disclosure rules to help customers decide whether they were happy that the broker would work in their best interests. But Scott Clark, Director of RIMS External Affairs Committee and Risk and Benefits Officer for Miami-Dade County Public Schools, said that he did not think the new rules were up to the job. “Unfortunately, the final regulation [194] does not live up to that standard, and instead the burden to request full disclosure has been placed squarely on the consumer,” he said.

RIMS therefore urged Aon, Marsh and Willis to commit to full compensation disclosure above and beyond the NYID regulation and called on the department to rethink its strategy. The association also encouraged other states to go further with their regulation and make a “strong effort to enact full mandatory disclosure requirements that will protect the insurance consumer.”

Last week RIMS used the Marsh statement as an opportunity to repeat its call for all brokers, not just the big ones that were the target of Mr. Spitzer’s campaign, to cease taking contingents as part of a ‘universal ban’.

“RIMS is pleased that Marsh has joined other large brokers in agreeing not to accept contingent commissions. We call on all brokers to make the same commitment to their customers,” said Terry Fleming, President of RIMS and Director, Division of Risk Management for Montgomery County, Maryland. “Further, we call on the insurance industry to develop alternative forms of compensation that do not place the broker in the position of a conflict of interest in the insurance purchase transaction,” he added.

The association also said that it maintains that contingent commissions impose an “inherent conflict of interest upon the insurance buying transaction, regardless of the nature of the client or the intermediary.” RIMS added that contingent commissions also impact prices, as fees are passed along to the consumer, and urged Marsh to adopt a ‘global ban’ on such commissions.

“RIMS recognises that many of its members regard enhanced commissions and contingent commissions as one in the same. To that end, RIMS acknowledges Marsh’s efforts to collect enhanced commissions on a flat fee, rather than a volume basis, and it encourages Marsh, its carrier partners and its clients to continue having open and frank discourse over the nature of such compensation, how it is collected and disclosed,” stated the association.

Back in Europe it emerged last week that the U.K. Financial Services Authority is unlikely to give its backing to calls for automatic disclosure of broker remuneration as part of a pan-European set of rules that is under consideration at the European Commission (see April issue of Commercial Risk Europe). It is thought that the FSA would advise the use of a system similar to that adopted under regulation No. 194 in New York.

The FSA’s likely refusal to back an automatic disclosure system could be significant because the FSA is a major force within the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), the body that will advise the Commission about commission as part of the review of the IMD.

“The Commission has asked CEIOPS for advice and it has agreed to provide that by summer. CEIOPS has formed a taskforce to respond and discussions are at an early stage. While the FSA operates an ‘on request’ regime, a range of positions exist within other member states. Discussions are focused on finding common ground,” Alison Phillip, Senior Associate, General Insurance Policy, FSA told Commercial Risk Europe last week.

The U.K.’s ‘on request’ regime will be reviewed this year by the FSA to see how it has worked and the outcomes will be used to inform any future policy decisions, the regulator said.

“Feedback from industry is positive with trade bodies telling us that the guidance is working well. Our review will test this view from the buyer’s perspective and all of our work over the past four years will help inform the debate in Europe on this issue,” said Mrs. Phillip.

“As an active participant within CEIOPS, the FSA can influence the advice given to the Commission and ultimately any final decision,” said Steve White, Head of Compliance and Training at the British Insurance Brokers’ Association.

“The FSA are not believed to favour mandatory disclosure, so it would be very likely that they will seek to use the results of their forthcoming thematic work to ‘influence’ the Commission’s thinking on this subject. To be able to influence, they need to do the thematic work sooner rather than later,” he added.

“There are five options open to the Commission, following advice from CEIOPS, as part of its revision of the IMD,” said Mr. White.

These are: First, repeat what was included in the first IMD on this issue. That is nothing and regarded as a ‘non-starter’ according to Mr. White. Second, introduce a disclosure upon request regime, as is in place in the U.K. and is the position in New York. Third, introduce mandatory disclosure, which is the position of FERMA. Fourth, use a so-called Customer Agreed Remuneration system, as is being called for by the Dutch Insurance Association [see below]. And, fifth, use a net rate system, as is used in Scandinavia.

Meanwhile, FERMA is currently in talks with BIPAR, the European brokers’ association, to try and find a market solution that would deliver greater transparency on broker remuneration, help avoid any potential conflicts of interest and the imposition of rules from the Commission.

Peter den Dekker, President of FERMA, gave a presentation to BIPAR members at the end of January on what buyers would like to see, including the introduction of automatic disclosure.

But, automatic or mandatory disclosure is generally only of real benefit to the middle and SME markets because the larger buyers already require and receive relevant information, are knowledgeable on how brokers are paid and generally place business on a fee basis, brokers say.

“This is less the case when you get into the middle market and the SME end, who may be less sophisticated buyers. It is quite important to make sure that there is a level playing field and that clients can assess their true costs when they look at different providers. If you don’t have mandatory disclosure, you may end up with a situation where one broker is remunerated on contingent commissions and one is not. So whilst the fee might look higher for one, in reality it is actually the other way around,” said Ken MacDonald, Head of Corporate Risks at London-based Miller Insurance Services Ltd.

Miller supports FERMA’s view that full disclosure of remuneration should be mandatory and also advocates that a broker should only be remunerated by its clients. This is, and always has been, our position, said Mr. MacDonald.

However, whilst automatic disclosure would be Miller’s preferred approach, Mr. MacDonald said that he doesn’t expect it to be agreed as a market solution at E.U. level and that a move towards disclosure upon request would be a step in the right direction.

“So to me that would be a victory of some sort for the buyers – they would get some consistency around this issue. I don’t really expect that mandatory disclosure will be agreed as a market solution. I find that very hard to envisage, especially considering the disparities on how brokers are currently remunerated and the impact on their businesses if this were to change,” he said.

Other brokers argue that full mandatory disclosure is a step too far, arguing that the extra cost to brokers, in terms of systems developments and labour costs, is wasted on customers who do not want the information.

Some argue that it could lead to too much information for buyers, which can mean they are less likely to engage with it, and say that an ‘on request’ system, which gives disclosure to those who want it, gives full transparency where desired.

“We have no problem with being transparent. The ‘on request’ system we (the U.K.) currently have, and that New York looks like opting for, is as transparent as the customer wants it to be, because if the customer requests the information, brokers will give a full and clear disclosure,” said BIBA’s Mr. White.

“There is a danger that the more information you give a customer, certainly in the SME and retail market, the less inclined they are to engage with any of them. That is a U.K. view and certainly the U.K. regulator is saying it should be about the quality of disclosures not the quantity. But it does look like the majority European view is one around quantity not quality,” he added.

In Germany there is currently no formal system for disclosure on broker pay, but, discussions are taking place to make things more formal whereby if a client requests information brokers have to release it, said Peter Schneider, Director of International Business at the German brokerage the Funk Gruppe GmbH, based in Hamburg.

Any market agreement or regulation on an E.U.-wide basis will be difficult to introduce, as each member state has different laws, standards and ideas on the best approach to take, brokers agreed.

As always in the E.U. whatever is decided must work in a lot of countries with different systems and this is of course a problem, said Mr. Schneider.

“The question is where do you set the standard? Do you do it at a low level because you want to make sure that certain countries can cope with regulations or do you raise the bar to the highest possible level, which can then cause a nightmare in these countries. So it’s a long journey. Things will change but it will take some time,” he said.

“It is going to be a real challenge for the policy writers within the Commission to come up with something that plies the middle ground,” argued Mr. White. “Whilst we have a preference for a market solution because we think it should be grown up enough to sort out the issue and not rely on the regulator, whether the Europeans would adopt a similar solution I am not sure. Because there are so many different approaches it would be difficult,” he added.

The Dutch insurers’ association, the Verbond van Verzekeraars (NVV), does not think that it can wait for any market agreement or E.C. rules and has published a position paper on broker remuneration that calls for Customer Agreed Remuneration (CAR), a mandatory disclosure system, for non-life insurance transactions in the Netherlands.

Under the system, insurers would no longer pay commission to the broker that would critically mean there is no hidden provision from the insurer to the broker, said a spokesman for the association. The broker and the consumer agree together what services are to be delivered, what the costs are and how it is going to be paid, he explained.

Frank van Akkerveeken, Managing Director of Rotterdam-based broker De Keizer Assurantie B.V., says that transparency and full disclosure is not a problem. But, he does not favour a CAR system and the banning of commission from insurers, as it will increase costs and administration for brokers and not necessarily bring benefits for clients.

“Then we have to change our business model entirely and spend much more time on compliance and regulation and defending our invoice instead of advising clients. If we have to fight every time to sell some hours to a client I do not see how the quality will increase,” he said.