Practice must stop
PAYMENTS from insurance companies to brokers based on the volume or value of business placed with clients give the industry a bad name, an insurance boss told a conference in London.
Joe Plumeri, chairman and chief executive of insurance broker Willis Group, which has a major base in Ipswich, said the return of so-called contingent commissions would overshadow the role the industry plays in rebuilding lives and business after disaster.
“How will we look as an industry if brokers can earn commissions from insurers for giving them business and not for the value we provide to our clients? We’re already one of the least trusted industries globally,” he told the 400 delegates at the annual Insurance Insider event at the Willis Building in London.
“People aren’t focusing on how we as an industry provide the capital and help pick up the pieces in San Francisco, Northridge, New Orleans, Cumbria and Lower Manhattan. Instead, they’re looking at how we are compensated, and they’re not happy, with good reason.”
He told insurance executives that simply disclosing broker and agent compensation is not “true transparency” because it doesn’t eliminate the conflicts of interest inherent in accepting contingent commissions.
“Simply telling clients that you are taking contingents does not make it okay,” he said. “It does not change the fact that you have an incentive to act in the interests of someone other than your client – and that when push comes to shove you might not fight for the best deal in the marketplace or advocate fiercely to recover a claim if you know your compensation from the insurer will suffer. It sounds like transparency, but it can never be true transparency.
“I am convinced that the only way to resolve the conflicts inherent in contingent commissions is not to take them,” he added. “We stopped taking them because we want to be paid for the value we provide our clients, not the insurance companies.”
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In October 2004, Willis became the first and only insurance broker to refuse contingent commissions from insurance carriers when working for retail clients. Regulators later banned the major brokers from taking such commissions.
“We actually took a big step forward to building trust with our clients when contingent commissions were banned for the largest brokers in 2005. At Willis, we’ve abolished them, and we’re not going back. We’re a better company for it,” Mr Plumeri said. Citing a lack of public trust in the insurance industry, Mr Plumeri said that a return of contingent commissions – payments from insurance companies to brokers based on the volume or profitability of business placed with clients – overshadowed the good the industry did.
Mr Plumeri welcomed the idea of establishing a New York Insurance Exchange.
“If ideas such as the New York Insurance Exchange take off, I hope they will be implemented in a way that allows us to place business with greater speed through smart technology. Ultimately, that’s our job: to place our clients’ unique risks with the best markets, prices and terms,” he said. But those behind it should be mindful of why previous attempts failed, he added.