Broker Conflicts, by James Marta CPA, ARM
October 15, 2004 USA Today
Marsh & McLennan accused of price fixing, collusion
The nation's biggest insurers are mired in a brewing scandal that many executives fear could shake the industry to its core.
New York Attorney General Eliot Spitzer alleged conflicts of interest Thursday, charging the insurance brokerage arm of Marsh & McLennan (MMC) with price fixing and collusion.
A damning civil suit accuses Marsh of steering clients to favored insurers and working with major insurers to rig the bidding process for property-casualty insurance coverage. The lawsuit says the victims ranged from large companies to school districts to individuals.
In addition to the civil complaint, Spitzer announced two guilty pleas on criminal charges against two executives at American International Group (AIG). They are cooperating with the investigation, which could ensnare other insurance giants and executives.
Some of the nation's largest insurance companies are accused in Spitzer's suit of steering contracts and bid rigging, including AIG, ACE (ACE), The Hartford (HIG) and Munich American Risk Partners. Other insurance companies are being investigated in a scheme that Spitzer said raises everyone's insurance premiums.
Some industry analysts were quick to point out a family connection to Spitzer's probe. Business legend Maurice "Hank" Greenberg runs AIG, while his sons Jeff and Evan are CEOs at Marsh & McLennan and ACE, respectively. Spitzer said he has no evidence of any family ties to the scandal.
…the companies had falsely "represented themselves as honest brokers offering their customers the best coverage from many insurers at the lowest cost, (but) they steered them instead to a few companies that gave them kickbacks and other payoffs."
When a government or an insurance pool seeks insurance coverage, the markets require the use of a broker to ensure that the same placement is not presented to the insurance carriers multiple times. The broker acts as an agent for the government (client) and in this capacity has a fiduciary responsibility to act in the best interest of the client. The broker can get compensated in a number of ways. One way is a fixed fee arrangement where the client pays a fixed dollar amount for the brokerage services. Also, the broker may receive a percentage of the insurance placement from the client or if the total is paid to the carrier, the carrier may remit a commission back to the broker.
When seeking coverage, the broker will “shop” the insurance market looking for carriers that would be willing to place the desired coverage. The selection of the carrier would be decided based on the coverage to be provided, the cost of that coverage and the reputation and fiscal strength of the carrier.
The concern by Eliot Spitzer and others is that the broker when presenting the recommended options to the client is steering clients to carriers that pay the broker higher commissions or other payments.
What can you do? What should you do?
My philosophy is full disclosure is the best policy. I think it is important that the broker contract clearly state how the broker will be compensated and that the compensation is limited to those amounts. Furthermore, the broker should be required to fully disclose all compensation related to the services provided. This should include direct and indirect commissions and payments. For example, if the broker receives a volume commission or payment for placement with a carrier, that payment should be disclosed. Additionally, if the broker has agreed to a fixed fee arrangement and if a commission is received, the commission should be netted against the fixed fee contract amount.
It is prudent that the client ask that the broker provide a summary of the marketing of the coverage.
I suggest an annual representation from the broker and carrier. The representation would address:
- Compensation received under the contract with the client.
- Full disclosure of commissions and other payments received as a direct result and indirect result of placements made.
- A statement that the best efforts of the broker were undertaken to make placements in the best interests of the client.
- Disclosure of financial interests that the broker and or the brokerage company may have with carriers.
In addition, the client should ask for the carrier to fully disclose the same. These representations from the broker and carrier should be compared to each other and to the contract with the broker to evaluate whether compensation agreements are being followed.
Do you have any other contractors that these types of disclosures might apply? Similar disclosures may be required from any investment advisors.
If brokers and agents want to get ahead of the concerns about their compensation and fair dealings related to their client accounts, they will be proactive in making their compensation agreements more transparent.
By James Marta CPA, ARM –FURNISHED TO AGRIP 12-7-04 BY JOANNE RENNIE OF PARASAC.
James Marta & Company Certified Public Accountants
Broker Conflicts, by James Marta CPA, ARM
SAMPLE:
ANNUAL BROKERAGE DISCLOSURES
Brokerage Company:______
Principle office: ______
Servicing office:______
Primary Broker / Agent:______
Client Name:______
Address:______
Disclosure of related compensation:
1)Annual fixed fees received: ______
2)Schedule of Commissions and Payments:
a)Have commissions been received related to this contract or any placements? Yes____ No____
Attach detail of payments and related coverage.
b)Have any other direct or indirect payments been received related to this contract or any related placements? Yes____ No _____
Attach detail of payments and related coverage
(note; indirect payments would include volume or similar payment agreements)
3)We have financial interests with the carriers or other entities that we have made placements with; Yes___ No___
Attach a schedule and explanation of the financial interests. This should include relationships with related commercial carriers or Joint Power Authorities.
4)Representations:
a)We represent that we have made our best efforts to make placements in your best interests.
b)We have fully disclosed all compensation both direct and indirect related to our service to you.
By: Primary Broker / Agent ______Date:______
Managing Broker / Agent:______Date:______