Reinsurance brokers can no longer rely on the traditional means of commission compensation for placing risks, and must begin charging fees similar to other professionals billing for services, says a business professor studying the industry.
In an interview with PC360, Paula Jarzabkowski, professor of Aston Business School and Marie Curie Fellow, says the current compensation structure for reinsurance brokers is becoming obsolete as large insurers seek to place business directly with an increasingly smaller group of reinsurers.
“Brokers are not getting their cut,” says Jarzabkowski, who led a three-year study of the reinsurance industry that was released in a report late last month titled, “Beyond Borders: Charting the Changing Global Reinsurance Landscape.”
That report, sponsored by the Insurance Intellectual Capital Initiative (a consortium of organizations associated with the Lloyd's insurance market), says the industry is seeking to bundle more and more risks, especially catastrophic risks, into single complex programs that could open the industry to financial meltdown.
Discussing the role of brokers in the reinsurance placement transaction, Jarzabkowski does not fault brokers for these placements, noting that they are following the desires of their clients.
And her thoughts on broker compensation do not reflect a belief that the role of brokers is any less valuable. In fact, she argues, broker services are just as necessary as they have been, and maybe more so.
In the past, brokers did the work of designing, structuring and developing a program, then placing it. Brokers were then paid a fee for the placement.
What is happening more often today is that brokers work on a program, and then are not adequately compensated because they do not place the coverage.
“Increasingly, those services have to be valued just like any other consultant,” says Jarzabkowski. “If you got KPMG, or someone like that, to do consulting services, you would pay KPMG for their services. You wouldn't say, 'Thanks KPMG for doing all that work for free, but now you get to take it out to the industry and get a percentage for what you are selling it for.'”
She continues, “In the past, the broker was the sales machine. Now, they are not the sales machine; they are more of an information and knowledge broker. And in some cases, I think, [brokers are] a very important aspect of the transparency of major financial deals that are global.”
One of the impediments to changing the compensation model is tradition, she notes. Some brokers are attached to their clients and find it difficult to change a longstanding relationship from its commission compensation model to fee basis.
“It can be a hard cultural change to make,” she says.
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