Commission investigation fueled by broker consolidation: Fitch

In its analysis of the recent civil charges filed against Marsh by New York Attorney General Eliot Spitzer, rating agency Fitch says the probe into broker commission practices may be an effect of broker consolidation.
In a statement, the rater notes, “Fitch believes that this situation is partially an outgrowth of the greater market power that vested in the hands of a few large brokers following a wave of consolidation in the late 1990s.”
Fitch notes that while Marsh is the only insurer named in the suit, other brokers are under investigation by Spitzer and could face similar charges at some point in the future. “At this point it is unclear whether these alleged collusive practices represent an isolated case or a systemic market problem, and whether further investigation will lead to litigation against these previously mentioned insurers (AIG, The Hartford, Munich-American Risk Partners and ACE, who are cited in the Marsh charges) or other market participants.” Thus far, two AIG executives and one from ACE have pled guilty to criminal charges related to the alleged schemes which Spitzer says involved bid-rigging and steering of clients to insurers who paid the best commission terms to brokers.
The charges are also a public relations blow to insurers already facing backlash from clients in both commercial and personal lines as a result of price increases implemented in the last three years. “Recent more prevalent trends of rate declines and resistance to further increases may accelerate if customers widely believe that previous deceptive practices by their insurer led to higher past premium costs,” the rater notes. However, Fitch adds that it expects brokers to remain a strong force in insurance distribution regardless of the outcome of the investigation or charges. And, the rater notes, there appear to be two separate issues at play: one is that of the appropriateness of contingent commissions and the level of disclosure attached to them; the other is a more serious issue of bid rigging and collusion, something which could have taken place regardless of whether the commissions being paid were contingent or not.
Both Fitch and Moody’s have lowered Marsh & McLennan’s ratings as a result of the charges and the expected impact on revenues resulting from the brokerage operation’s decision to discontinue contingent commissions, also known as placement service agreements (PSAs). On Tuesday, Marsh disclosed that PSAs account for about US$845 million in revenues annually, or 7% of revenue.