Whose Side Are You On?

The traditional roles of the insurance world are changing. As a result of investigations into bid rigging brought by New York Attorney General Eliot Spitzer against Marsh & McLennan, the world's largest insurance broker, brokers are being forced to provide more transparency into pricing and to unbundle services, according to a study released in February by Hartford-based Conning Research & Consulting. The shift in the business model, the study reports, creates an opportunity for insurers to connect with buyers directly.

"One interesting point in the evolution of investigations since late last year is the questioning of the transparency of broker service pricing," says Stephan Christiansen, director of research at Conning. "Brokers will be pressured to unbundle a lot of their services," he notes. The pressure for transparency and unbundling of broker services leaves insurers in a position of opportunity, according to the study. Without the ability to bundle value-added services into product offerings, brokers lose a competitive advantage, providing insurers with an opportunity to target buyers directly.

Further, the unbundling of services likely will require brokers to make additional technology investments, relates Christiansen. Brokers "will need to address structural technology issues in how they compete in all service areas and how to deliver services in a competitive way," he says. "The point being that they may need to look at management, consulting and accounting systems solutions."

Declining compensation fees due to market concentration and lower commissions initially prompted brokers to seek new revenue streams, according to Christiansen. Developing services for agents and clients and monetizing value-added services such as risk management and claims management consulting was a way for brokers to generate new business. Now, though, brokers will be forced to compete more directly with each other and insurers in wider areas of risk and management consulting, according to the study, "Prospects for Agents and Brokers - Producers, Consultants, or Distributors?"

The push for transparency already has resulted in pricing changes. According to the study - which is based on recent commentary, testimony transcripts and polling data produced by risk managers, brokers, underwriters, lawyers and insurance regulators as well as more than 30 interviews with lawyers and senior executives at broking and insurance companies - the largest brokers already have abandoned the use of contingent commissions. Contingent commissions, however, are unlikely to disappear completely, Christiansen notes.

To support new services, brokers have made significant investments. "Brokers have been investing in technology to provide risk management and claims management services," says Christiansen. Therefore, some of the fees that brokers are seeking are justified, he suggests. Still, the study says, commissions are bound to become more transparent, as will the details of agency and broker contracts.

The next question is, "Who must disclose what?" The difference between agents and brokers was blurred in 1999 when, in response to the Gramm-Leach-Bliley Act, the NAIC Model Producer Licensing Act was adopted by most states. The licensing law applied the concept of "producer" to both agents and brokers, limiting the distinctions between the two, Christiansen relates.

According to Conning's study, the NAIC model law that emerged at the end of 2004 as a proposed amendment to the Producer Licensing Model Act requires producers that accept compensation from a client to document disclosure of any compensation received from insurers before the client purchases insurance. "There may be a return to clarifying who each intermediary is working on behalf of," explains Christiansen.