Restoring trust: relentless investigations and painful revelations have led insurers, brokers and risk managers to probe long-standing business practices to their very foundations.

When Willis North America recently approached an insurer on behalf of some middle-market clients, the broker walked away from the discussion for a reason that, 18 months ago, might have seemed puzzling.

"We rejected the appointment because we don't accept contingent commissions" explained Mario Vitale, chief executive officer of Willis North America. A once normal practice had become taboo, at least for the world's third-largest insurance broker, and the insurer that only would accept the account by paying a contingent commission looked out of step with the times.

"You still have people more worried about the process than the product and service. That's the worst thing," said Vitale in a round-table discussion hosted by Best's Review in Philadelphia. A six-member panel discussed what business models brokers, insurers and buyers could follow after the turmoil that saw long-standing industry practices called into question amid explosive allegations of bid-rigging and steering of clients by brokers and insurers. At the center of the storm were contingent commissions--special payments, not illegal in themselves, by which insurers rewarded brokers for placing more and better business.

To Vitale, rejecting contingent commissions means both repudiating some recent history and embracing a more distant past, when the brokers and insurers competed on service, products and advice. "Everybody needs to go back, revisit how we were created and what we're supposed to do, and get back to the fundamentals of our business," he said.

The round-table discussion, which assembled two brokers, two risk managers, an insurer and a regulator, suggested Vitale had captured a shared sense of where the industry needs to go, though not how to get there. Still, broad themes emerged for a business, tainted by impropriety, that needs to restore trust.

Time for Transparency 

Ending contingent commissions, at least at the largest insurers and brokers, has been considered vital to rebuilding trust with clients, many of whom lost some faith once New York state Attorney General Eliot Spitzer put the practice under suspicion.

"I think there was stuff going on in the closet we didn't know about,' said Lance Ewing, vice president of risk management for Caesars Entertainment Inc. "The regulators were selling flashlights, and we haven't shone that light back in there."

"The thing that really just upset me tremendously is the fact that I really wasn't sure whether I was getting the most objective view of the market from the brokers" once Spitzer's allegations emerged, said Sheila Small, risk manager for Verizon Communications.

The allegations not only brought regulatory and legal misery, they also sowed public mistrust. Under legal or public relations pressure, many brokers and carriers jettisoned contingent compensation, but restoring comfortable relationships among the parties seems a distant goal. For many, it never will be the same.

"I pride myself on the relationships and the trust that I have put into the brokers, the carriers, etcetera," said Small. "A lot of that has now come up to question. And now we, as risk managers, are being questioned, by our board, by our senior management."

Rebuilding that trust, all sides seem to agree, calls for transparency as to who is paying what to whom, and for what services. Mario Vitale, chief executive officer of Willis North America, suggested none of this is new, just somehow forgotten.

"I remember when I even started in the business, that all insurance companies disclosed right on the policy what commissions they paid their agents," Vitale said. "Somewhere over 25 years, it's not there any more."

But transparency is more than putting figures on paper. "For an insurance broker like ourselves, what we need to do better than we've ever done before," Vitale said, is "not only explaining to our clients the value that we provide, but being completely transparent about it--transparency is not just about communicating the cost and how much we make; it also has to be about our communicating what we do--the value we bring to the client."

Part of that transparency is giving the client the facts to make an informed decision.

"When you put a deal on the table, you're seeing a Pinto and you're seeing a Cadillac," said Steve DeCarlo, president and chief executive officer of American Wholesale Insurance Group. "It's the broker's job to explain, there's the Pinto--price, coverage, form--and here's the Cadillac. You as the buyer get to make that choice ... now, not only do you get to make the choice in the manufacturer, but you get to make the choice in how we compensate the person bringing the manufacturer to the table."

Another change, DeCarlo noted, is that "the guy bringing you those deals is saying, 'Look, the Pinto is paying me double what the Cadillac was, that's why I was selling the Pinto.' And now I'll sell the Cadillac, because it's the same."

Ewing added, "In between there, you've got to show me the Chevy."

Transparency is extending throughout the brokerage business. "If I have a business interruption claim and they use their forensic accountants, it's almost like seeing a lawyer's bill," Ewing said. "There's a line by line, number of hours spent on it, number of hours reviewing, so we're almost getting to the billable hour approach to things."

Wholesalers such as DeCarlo's firm, which help retail brokers gain access to hard-to-reach-markets, face their own issues. American Wholesale had just purchased Stewart Smith Group, Willis Group Holdings Ltd.'s wholesale arm, as the round table convened. The move was seen as reflecting the industry's drive toward greater openness.

"We think that's good, we think that's transparent, we think it proves ... what the regulators were saying: Retailers and wholesalers might not want to be connected together under one corporate umbrella," DeCarlo said. "Other people have said that's not a problem, just like other folks have said contingent commissions are not a problem ... people have said, 'I have a wholesaler, so what?' I obviously believe independence matters."

"I think the regulator and the risk-management community wants to know that there's not that interdependency or that conflict of interest," Ewing said.

For regulators such as Audrey Samers, deputy superintendent and general counsel for the New York State Insurance Department, the change is all good.

"I think it's fundamental, the trust relationship between the risk manager and a broker," she said. "But if there's evidence that one of the parties is not keeping that relationship, then you should question that. Because there is evidence from the investigations that risk managers were relying on brokers and had this long, trusting relationship and in some cases the broker might not have held up his end of the bargain."

Some aspects of the business are less easily changed--such as consolidation of the brokerage field into a relative handful of players. "I don't think you would have had the steering situation if there were 10 or 12 brokers," said Shivan Subramaniam, chairman and chief executive officer of commercial property insurer FM Global.

"Dominance led to arrogance," said DeCarlo. "Why doesn't the government step in and say, 'An individual broker can only control so much of the domestic market.' They do it in banking. They say you can only have 10% of the deposits in the United States. That's how you control arrogance, because you won't have somebody roll up and become so large that you dominate the marketplace ... We saw domination. Absolute domination, which led to steering."

Samers, however, resisted blaming too much on consolidation. "The dominance of [Marsh, Aon and Willis] might allow for the behavior that occurred, but it doesn't cause it," she said. "And that was not the root of the problem. It allowed for it perhaps to happen ... but it doesn't cause it. You need better controls in the effort to not allow illegal behavior to occur."

Rebuilding the Service Culture

When billions of dollars are removed from the equation of brokers, insurers and buyers, and the remaining money is in plain sight, all parties need new ways to differentiate themselves. Those new ways, most agree, involve service that may help to recoup some of what was lost with the near disappearance of contingent commissions.

"It's just a matter of getting back to the basics," said Steve DeCarlo, president and chief executive officer of American Wholesale Insurance Group. "Provide value, you get paid. If you don't, people tell you to go home."

Audrey Samers, deputy superintendent and general counsel for the New York State Insurance Department, suggested the actions of state Attorney General Eliot Spitzer and the department advanced the industry's cultural shift. "I think the point of the settlements that the AG and our department entered into is that the consumer would know what they were paying for and get valuable services," Samers said.

"The difference between good service and bad, we know what we have to do, it's just very hard to execute," said Mario Vitale, chief executive officer of Willis North America. "And the companies that figure that out will have ... a market share cornered on it, and it won't be a trade secret, just that they can execute their greatness from their great people, their great culture."

The bar may be raised, especially among sophisticated risk managers who can negotiate their own coverage.

"I can go directly to an underwriter and bypass the broker," said Lance Ewing, vice president of risk management for Caesars Entertainment Inc. "They know that I can call the underwriter directly in London, have a conversation and then bring them up to date on what we talked about. I don't need them to hold my hand at every step of the process."

The new landscape also looks more competitive.

"I think there are some new players coming into the market," said Sheila Small, risk manager for Verizon Communications. "Some midsize to smaller players are starting to see this as an opportunity to go into some of the larger Fortune 100 companies, and I think it's going to be a very exciting time."

While brokers face heightened scrutiny of what they provide in exchange for their clients' fees, insurers also face pressure to find new ways of attracting brokers and insureds--with fewer financial incentives.

"I have seen lately the carriers giving back more to the client than what I've seen in the past," said Ewing. "You know what the carrier used to say: 'That's the broker's responsibility. Let the broker handle that. That's part of the broker's service.'" Now, he said, carriers are offering more of these services, "so you're not carrying the whole team on your back any more as a broker."

"The only way you're going to distinguish yourself is to come up with a product that has a superior set of services, because you no longer have the price advantage, because that's now transparent," said Shivan Subramaniam, chairman and chief executive officer of commercial property insurer FM Global. "A simple thing ... is start to focus on getting the policy out. Instead of a binder, you have a policy. Right now, as an industry, we've sort of evolved into this situation where we have a binder that's proof of coverage, which then allows the insurance company to build a product, and you don't know what that product is."

Ewing offered a case in point. "I left a carrier who I had a relationship with for four years because he couldn't get me the policy after nine months," he said. "And I told him up front, if you don't get me the policy within nine months, you're done next year, you're gone."

That expectation of service carries throughout the relationship. "An insurer may offer the best price, but what good is it if the company's not going to be there when a claim comes along?" said Small. There are many selling points brokers can present to customers, she said. "If the insurance company has the right product, and it's coming from the right insurance company, then why does the insurance company have to give something to the broker to get them to sell this?"

Vitale predicted an uncomfortable transition, but he said, "I foresee this coming out good. And I believe that insurers shouldn't be in the incentive business."

The Cash Balance

However the insurer-broker relationship realigns in the post-Spitzer era, few expect all the lost revenue to return. Most major players are drafting new business models around that reality. Brokers can't simply reach into a different pocket for what used to be contingent commissions.

"When I set a fee with my broker, I felt that was the value I was receiving from the transaction" said Sheila Small, risk manager for Verizon Communications. "So, now that they're looking to sort of substitute some other type of income for these contingency fees that they are no longer getting, I think they have to look internally ... we've all been there, we've all had to cut costs within our company. And I would have a hard time with them coming back to me and saying, 'OK, I've lost this much money on the Verizon account, and therefore I want you to subsidize that amount that I lost.'"

Lance Ewing, vice president of risk management for Caesars Entertainment Inc., suggested that on this issue, taking a principled stand may not be easy. "There are certain brokers that are saying, 'The squeeze isn't worth the juice any more on your account, and we have to either let you go, or you're going to pay me more,'" Ewing said.

Steve DeCarlo, president and chief executive officer of American Wholesale Insurance Group, suggested brokers have more than one way out of the revenue bind. "Why are we assuming the revenue is neutral?" he asked. If the former contingent commissions no longer are paid, "why are we allowing those funds to remain in the insurance company? Why wouldn't they inure to your benefit as a client and ultimately, if we're able to get you that benefit, why wouldn't you see our value in negotiating you the best terms, the best price, the best deal?"

Carriers also have a part in the new financial equation, suggested Shivan Subramaniam, chairman and chief executive officer of commercial property insurer FM Global. Insurers' challenge, he said, is "to come up with a product that's going to make the broker's life a lot easier--in other words, lower their cost structure."

"Service has got to be delivered when you promised it, and the more you do all of that, the net effect ... is going to reduce your cost structure, and it's going to reduce the broker's cost structure," Subramaniam said. "I want to make sure that I have a product and service that makes it very attractive for the broker to come deal with me."

Some corners of the market, DeCarlo cautioned, may cling to monetary incentives, "because you can eliminate the contingent commission, but you can't eliminate the situation where a supply-side capital provider decides they want to be in a market and they want to pay 20%."

Mario Vitale, CEO of Willis North America, said he had seen an estimate that 65% of independent agents in North America would be bankrupt if contingent commissions were to disappear entirely.

Subramaniam suggested risk managers need not fear brokers' financial adjustments. "If you feel that a particular broker wants to recapture all of that income, that's when the other brokers are going to provide a much better transaction," he said. "I would think in a short period of time, all of that's going to settle itself out. It's not going to be a process where each person is going to recover whatever they had in the past."

Buying With Confidence

The uproar over broker compensation left corporate insurance buyers somewhere between righteous indignation and public embarrassment. They expressed outrage at hidden misdeeds, but they faced hard questions about widely accepted practices. Risk managers are entering a newly transparent, competitive environment--but under sharp scrutiny from management, boards of directors and shareholders.

"There are shareholders asking those questions from the floor at annual meetings," said Lance Ewing, vice president of risk management for Caesars Entertainment Inc. "They're saying, 'Are you aware that Mr. Spitzer, or whichever attorney general of the flavor of the month, is suing the carriers or the brokers?'"

Small also noted that risk managers' long-term relationships are under examination by management. "I think you see the model transforming, and I think we do need to go and reaffirm--whether it's test and change or just reaffirm--that in fact this is the right relationship, and there's a lot of integrity and there's a lot of ethics around this," Small said. "Perhaps we may not have wanted to do that. We feel comfortable; we don't get up in the morning and think that our broker is perhaps being dishonest."

"I don't want that pendulum to swing too far the other direction, where we're buying insurance like it's a loaf of bread," Ewing cautioned.

Steve DeCarlo, president and chief executive officer of American Wholesale Insurance Group, underscored that point, suggesting risk managers could benefit by not hastily abandoning long-term relationships-but daring to ride out short-term swings in pricing. "That's the kind of relationship we try to build," DeCarlo said. "Saying, 'Look, it's going to go up and down. I'll do the best job I can for you in a hard market, because if you stay with me in a soft market, I know I can be the leader and get you better terms."

"A number of my colleagues ... are unemployed because they went the opposite way," Ewing said. "When the rates went down, they went into the CFO and claimed, 'look at the great job I've done for you, and I made the sun come up this morning, too' ... and then when the hard market came--remember that closed-door meeting--there was a pink slip at the end of it because they couldn't redo what they did."

"I think that part of the mirror needs to be turned back on risk managers; Ewing said. "We didn't ask the underwriters to show up at our properties and sit eyeball to eyeball. We relied a lot on the brokers." With that reliance, Ewing said, some risk managers wrongly assumed the fees they paid to brokers would secure the best deals. It demonstrates, he said, the importance of having relationships with the insurance companies' underwriters.

Small said this is more likely in larger companies, which "not only have sophisticated risk managers working with the brokers, but typically have one-on-one relationships with their carriers."

Audrey Samers, deputy superintendent and general counsel for the New York State Insurance Department, warned against complacency, saying a soft market doesn't excuse carelessness by risk managers, and noting there were a number of "sophisticated clients" among those eligible for compensation in the states' settlements with brokers.

"In a softer market," Samers said, "you should care if a broker's recommending a product for you that is not in your best interest because they're getting some other type of compensation."

Mario Vitale, CEO of Willis North America, said recent events would foster more of an equal partnership among all parties to insurance transactions: "I think it's just going to allow everybody to work together in much more concert, which I think is the right way."

Key Points

* The compensation-centered model of insurer-broker-client relations is giving way to a service-oriented focus.

* Transparency has become the watchword as all parties seek to rebuild trust in their relationships.

* High efficiency and lower costs will be key ingredients to financial success for brokers in the future.

Learn More

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