Concerns about broker compensation have not escaped the attention of public-sector risk managers, who fear being cheated out of taxpayer money. However, the question is whether buyers–in the public or private-sector–are up to the job of monitoring their intermediaries' conflicts. Our own Caroline McDonald got an earful on the controversy this week from the outgoing president of the Public Risk Management Association, Katherine M. Peeling.
To read NU's complete interview with Ms. Peeling, risk manager of the school system in Anne Arundel County, Md., click here.
Ms. Peeling told NU that because she was always suspicious about the potential for “kickbacks” when brokers place coverage, when she saw hidden fees and bid-rigging exposed by Eliot Spitzer, forcing the jumbo brokerages to radically alter their standard operating procedures, she felt “kind of elated to see it all come crashing down, because I thought that would force transparency, or at least to a much bigger degree.”
Ms. Peeling, whose organization is now self-insured, admitted to having suspicions all along about how insurance in general was brokered. “When we went out to the market for a broker, we would try to structure it in such a way that there was a fee for providing the servicebut I never really knew if they also got a contingency fee, too, she said.
Unlike the Risk and Insurance Management Society, which has been very vocal in its criticism of insurer and brokerage behavior over the past few years–lambasting the most recent supplemental compensation deals proposed less than two weeks ago (see my blog entry of June 11)–PRIMA has yet to come out with a formal position on contingency fees.
However, Ms. Peeling made it clear to NU that government risk managers have a duty as part of their public trust to stay on top of all vendors, including insurance brokers and carriers.
Being in government, we have to be so transparent about everything, she said. Public risk managers have to be extremely careful with their transactions because they are dealing with tax dollars. We have to try to spend them as wisely as we can.
Just because the biggest brokers swore off contingency fees in settlements with state attorneys general, doesn't mean the problem is gone, as many middle-market firms and just about all independent agencies still accept supplemental forms of compensation. Therefore, buyers need to be on the lookout to make sure there are no behind-the-scene deals going on to influence their intermediary's choice in markets.
Ms. Peeling is well aware of the danger, urging public-sector risk managers to be more forthcoming with their brokers. Spell out exactly what kind of services” brokers will provide, she advised, “and expect…to pay for some of those services. Theres no such thing as a free lunch. We all know that.
However, one of the major points I've raised since the contingency fee scandal broke is whether risk managers–public or private sector–are up to the task of monitoring their brokers.
Disclosure is critical and should be second-nature by now, but do risk managers know what to do with the information their brokers disclose to them? Can they make heads or tails of supplemental compensation agreements–especially if there are complex contingencies involved?
Sarah Perry, who will take over as PRIMA's president this time next year, told NU that some of the people who handle the risk management functionwhether theyre called risk managers or whether thats just part of their jobarent educated enough to make the demands of their brokers.
Ms. Perry–who, as risk manager for the city of Columbia, Mo., employs one of the big-four brokers on a fee basis to shop her coverage–noted that for many of her colleagues, risk management is only a portion of their job. They often dont know what to ask for. They could be a city clerk or in some other job.
She threw in a plug for PRIMA, noting that hopefully, if they attended conferences like PRIMA and their local chapter meetings, they would become more educated.
What do you think? Are risk managers up to the job of broker monitoring?
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