April 19, 2005 by Canadian Underwriter
The CEOs of two of the world’s leading brokerages gave differing views on what the future of intermediary compensation should look like at the keynote panel discusssion at the Risk & Insurance Management Society (RIMS) Conference Tuesday.
New Marsh CEO Michael Cherkasky says all brokers should discontinue accepting contingent commissions, noting “contingencies are inherently a problem” in terms of the perception of conflict of interest. However, recently retired Aon CEO Patrick Ryan, who remains the company’s chairman, says that while his brokerage has discontinued accepting the commissions, others would have to make their own decisions. “That’s up to them, it’s a free market. It’s between you [risk managers] and the people you do business with [brokers].” Ryan adds that when it comes to basic commisssions, different insurers pay different rates already. “We’re not going to have standardized commissions [across carriers],” he predicts.
Cherkasky countered saying the appearance of a conflict of interest will continue if commission terms are not the same amongst carriers. “You can’t have a market where someone pay you 8% and someone pays you 10%,” he argues.
Speaking from the risk manager’s perspective, Susan Meltzer says transparency and disclosure are about more than contingent commissions, however. Meltzer, assistant vice president of risk management for Sun Life Financial and a former RIMS president, says “transparency is not about contingent commissions, it’s about transparency of all ancillary income [received by the broker].” She says the industry’s problems arose from an “aura of secrecy” around brokers and insurers, and adds that this extends to the secrecy surrounding reinsurance transactions undertaken by insurers although these directly impact buyers because it speaks to the ultimate ability to pay claims.
Meltzer also challenged the broker leaders to get their own organizations on the path of enterprise risk management, noting, “you missed the most significant risk facing your companies”.
Both Ryan and Cherkasky were in agreement on the need to deal with the issue of compensation within the industry, rather than through greater regulation. “What does federal regulation ever do positively for any industry?” Cherkasky challenges.
Meltzer adds that risk managers need to take responsibility for their role with respect to ensuring disclosure takes place and to better managing their relationships with brokers as they would manage any other outsourced service on behalf of their organizations. After RIMS published its guidance on contingent commissions more than five years ago, she says few risk managers followed through with demands for disclosure and many of those who did faced resistance on the part of brokers to providing the information.