The practice of accepting contingency compensation from insurers has always been a dark cloud hovering over the reputations of commercial-insurance brokers. By stating on Wednesday that it would no longer accept such payments in its "core" business, Marsh, which bills itself as "the world's leading insurance broker and risk advisor," has taken a major step in clarifying that the broker's role is to serve corporate insurance buyers -- and only corporate insurance buyers.
On its face, a broker's acceptance of payment from an insurance company for placing a certain volume of business with that insurer represents a blatant conflict of interest. When a broker agrees to find coverage for a company in return for commissions or fees from that company, the assumption is that the broker's sole allegiance will be to the client. That allegiance means the broker must survey the insurance markets in an unbiased way to obtain the best and cheapest insurance for the client. But taking contingency payment from an insurer is bound to bias a broker toward that insurer and not necessarily toward the best interests of the client.
Up until its statement this week, Marsh's position on contingency pay has been muddy. To be sure, as a condition of its $850 million settlement of a 2004 lawsuit by then-New York Attorney General Eliot Spitzer, Marsh had to stop accepting such compensation. During the four years it labored under that prohibition, Marsh made a virtue of necessity by touting the transparency of its compensation reporting. At the same time, however, the broker argued that the ban was unfair because smaller intermediaries were free to get volume-based payments from carriers.
Recently, however, the highly influential New York Insurance Department erased the prohibition on Marsh and other big brokers. The firm responded, admirably, by announcing that it "will not accept contingent commissions on any placements for any U.S. clients served by the firmęs core broking operations." Presumably that includes placements for the large and medium-sized companies many CFOs work for.
Smaller organizations, however, are in a different category. Such companies most often are served by insurance agents rather than brokers. The key difference is that clients understand that agents are paid by a handful of insurance companies to place business with them. Accordingly, Marsh's statement included the proviso that the recently formed Marsh & McLennan Agency "will accept contingent commissions." And that's as it should be: although good agents serve their clients well, it's insurers that pay the bills. But brokers must serve only one master. |
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