Mr. Vincelette, speaking at a monthly virtual seminar with members of the Public Risk Management Association, advised risk managers to look out for “warning signs that may indicate your business may have been involved in some form of manipulation.”

One such warning sign is premiums that have increased when the market overall is seeing cuts, “and there is no correlation to an adverse trend in loss experience, then youve got a little flag,” Mr. Vincelette said. “Now, flags don't mean something is wrong, but it means it's unusual and something you should look at.”

Another possible flag is a broker who is reluctant to discuss or disclose total account-specific compensation, he added noting, however, that most contingent agreements and incentive compensation deals are based on a total book of business and are not account-specific.

“So every account that was placed there added up to a total,” he explained. “What amount is applicable to an individual account? If it's a volume incentive, it could be the percentage of premium.” If it is based on profitability, however, he added, “that is a whole other calculation based upon the individual account profitability.”

Mr. Vincelette cautioned that it can be difficult for large brokers especially those with segregated parts to their organization “to be able to track in one place all of their compensation.”

An insurance subsidiary, for example, could be using a separate information technology system from its retail brokerage, he noted. “So now you have two systems that are otherwise separate and distinct, and that is the case in many of these organizations,” he said. “But they should be willing to at least tell you what some of the difficulties may be, and/or they should be willing to amend the contract so that it requires them to disclose any compensation or total account compensation.”

In addition, he said, brokers should be willing to divulge who they have compensation agreements with, if they have them.

Another warning flag, he said, is reluctance on the part of the broker to arrange meetings with key markets, “or to allow you to have an active role in that meeting and get to know those markets.”

Each party to the transaction needs to be able to call the other party involved in the deal. For example, “if I'm a pool and a broker is placing reinsurance, I want to understand who my reinsurers are,” he noted. “If I am an individual entity, and I have business being placed with two or three insurers, I want to have the ability to have relationships with them. That doesn't mean I'll be on a plane to London, but it does mean I might be able to have a phone conversation with those individuals.”

If there is strong broker resistance to involving third parties, “one of the things I'm hearing a lot is that insureds are looking at maybe bringing someone in to oversee the process somebody more familiar than they are with the actual solicitation, negotiation and placement of that business in the marketplace,” he noted.

Mr. Vincelette said this solution can be helpful to risk managers and/or pool administrators, who “need to feel that they can go to their bosses and explain what steps they have taken to know what compensation is in place.”

An insured needs to require the broker to provide, when possible, that organization's total account-specific compensation for the past three years, including all fees, commissions and other income from consulting, insurance and reinsurance placement, he advised.

For example, he explained, a buyer may be paying a local broker for placement with an insurer, who then might hire that broker on an account-specific basis to place reinsurance on that same account. The reinsurance placement may involve additional compensation, he noted.

“So you have the right to know what account-specific compensation is in place on your account recognizing that a lot of these brokers don't tether that together quickly and easily.”

He added that “just because you may hear, It's not going to be easy for us to do that,' that may be a fairly legitimate answer, but it also means that broker needs to update and coordinate its IT system to allow it because as we hear, the regulators in this country and abroad are talking about the need for disclosure.”

One of the things buyers need to pay attention to is the broker's track record, he emphasized. But also important is to look to the future and “make sure that you take the same level of care and precaution that you would if you were out buying a house and getting a mortgage.”

Buyers who are not comfortable getting such details from brokers may need to think about requesting the information from the insurers themselves, he said. “People disagree with me in this area, but when I was an insurer I got a lot of calls from auditors who wanted to confirm payment amounts, who wanted to confirm commission amounts, and who wanted to confirm claims payments that were going on with captive insurance companies,” he explained.

He suggested that risk managers consider changing commission-based compensation to fees for service, and require mandatory disclosure. If buyers want to leave their account on a commission basis, they could cap the amount.

“Years ago, I found that with these commission accounts, sometimes the commissions a few years after a catastrophe are huge,” he said. “And you ask if there is any correlation in the compensation the broker is receiving and the work that is actually involved in doing the placement.” He added that “if we were compensating lawyers based on the percentage value of the house that we were buying, we would feel differently.”

He also suggested hiring a third party to review expiring placements and to either oversee or audit upcoming placements. “That can cost money. It could even sound self-serving for someone like me,” the consultant conceded. “But to be honest with you, that may be cost-effective rather than starting the process over. You may spend a lot of time, money and effort to redo something that didn't need to be done.”

Those who feel they need to change brokers should have a good reason, he noted, warning that changing brokers on complex accounts takes time, energy and lead time. “Realize that if you are going to change your broker, you may be reading about your new broker, because [New York Attorney General Eliot] Spitzer has made it clear [his probe] isn't over,” he concluded.

Generally, he said, the majority of buyers feel comfortable with their broker. “It's a matter of being able to convince superiors; it's a matter of being able to know for yourself that you are not a part of something like some of the districts that we all read about in terms of being overcharged, or some of the other for-profit organizations that have been overcharged,” he said.

Sidebar, page 21,with guy with halo art:

Flag: Honesty Checklist

Head: What Should You Do?

To protect themselves from unethical brokers, Rich Vincelette, a risk management consultant with the Sabael Group, suggests that risk managers do the following:

Amend all agreements and contracts to require disclosure of all compensation that is account-specific including incentive compensation with insurers or reinsurers.

Request a copy of your broker's disclosure policy. Many brokers have put disclosure policies on their Web sites most of them would not take exception with the issue of disclosure.

Insist on a dialogue with all parties to a transaction at least with key insurers or reinsurers. Talk to them not only about risks, limits and coverage terms, but about aspects of relationships they have with your broker. Find out if they have other involvements with your broker to determine any potential for conflict of interest.

Consider changing commission-based compensation to fee-based plans and require mandatory disclosure. If you want to keep your account on a commission basis, cap the total.

Consider hiring a third party to review expiring placements and to either oversee or audit upcoming placements.

Flag: Help Available

Head: Buyer Groups To The Rescue

Beyond the virtual seminar described here that was run by the Public Risk Management Association, other organizations are addressing the broker contingency fee controversy.

• The Risk and Insurance Management Society announced that those planning to attend its 2005 Conference and Exhibition in Philadelphia are invited to register for RM 204 and RM 230, “Broker Contingency Fees What You Should Know.” These seminars will include in-depth discussions of contingency fee deals.
• RIMS' “Quality Improvement Process” guides and facilitates communication with industry partners while helping buyers evaluate agreements with vendors, including brokers.
• The National Alliance for Insurance Education & Research said it has not yet added courseson broker fees, but that this is “a serious matter and something we're cautiously looking at.”

Reproduced from National Underwriter Edition, April 29, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.