The Risk and Insurance Management Society recently published its executive report on insurance broker compensation, "A Practical Guide to Insurance Broker Compensation and Potential Conflicts of Interest for the Risk Manager," to give risk managers an insight into the broker compensation structure and potential conflicts of interest resulting from broker relationships with insurers.

"In ideal settings, insurance brokers and risk managers are working very closely toward a common goal - marketing the insured's coverage to achieve optimal results within the commercial insurance market," says Deborah Luthi, director, RIMS External Affairs Committee. "However, because the industry has yet to mandate full disclosure, risk managers must be diligent in their broker selection process. This report gives them the tools they need."

Terry Fleming, vice president and director of finance for the nonprofit organization, spoke with EBA about the report and how brokers can remain mindful of the ever-present need for transparency in customer relations.

What led to RIMS publishing this report?

RIMS has been on record for years with respect to broker compensation and the potential conflicts of interest that are inherent in the insurance purchase transactions. There is an inherent conflict of interest that must be mitigated when a broker, purportedly representing the buyer, is compensated by both parties. Since contingency fees are not illegal, we need to provide education to our members so they can mitigate the conflict.

Can you give us an idea of your membership?

RIMS has approximately 10,000 members, including 83% of the Fortune 500 companies and 85% of the Fortune 250 companies. We have 3,500 corporate members of all sizes, including manufacturing and service companies, nonprofits, universities and colleges and public entities. Our membership includes a number of smaller employers, which we classify as having 500 or fewer employees.

What are you hoping the report will accomplish?

This report is timely because of the lifting of settlement agreement by the State of Illinois with one of the large brokers, and the indication that the New York Attorney General will lift the restriction from accepting contingencies on the three largest brokers that agreed to forego contingencies in the settlement with then Attorney General Elliot Spitzer.

The report provides our members with a step-by-step process leading to transparency in the compensation arrangement with brokers.

We also hope that the document is helpful to companies that do not have full-time risk managers since the middle market and small market brokers have continued to accept contingency fees.

Any new rules in the works?

I know that Congress and some state legislatures debated the issue after the Spitzer investigations, and RIMS testified before several of the legislative bodies, but no legislation has been enacted with respect to broker compensation. The State of New York Insurance Department has proposed a regulation with respect to broker compensation, which RIMS will continue to monitor.

What are the highlights of the report?

The report highlights the types of broker compensation, including several forms of compensation that buyers may not be informed are in play. It also recommends what steps risk managers can take to require transparency from their brokers.

Are certain compensation types more prone to conflict than others?

There are several forms of compensation that may not be disclosed to the insurance consumer. The big issue has been contingent commissions, but there are others that need to be managed, as well. To give an example of how this works, let's say you're working for an employer [as the] risk manager and your employer needs to buy insurance. Typically, how that's done is you go to an insurance broker who has access to insurance markets.

There are a number of ways that the broker can get compensated. For example, fee for service, where the broker is paid a flat fee by the buyer for the process. A second method is for the broker to collect a commission, meaning that they place the coverage with an insurance company and get paid a percentage of the premium.

Contingent commissions are paid by the insurer to the broker based on specific criteria such as volume or quality of business that the broker brings to the insurer. This can be done in a number of ways, depending on the insurer's marketing strategy. Unless the buyer has an agreement with the broker for full transparency, they may not be told about the additional compensation. The Spitzer investigation found that some brokers were steering business to insurers that paid higher commissions as opposed to placing the coverage with the buyer's best interests in mind.

Do you have advice for brokers to ensure that they're being as open as possible?

RIMS has consistently called for a broad prohibition of contingent commissions. Absent that, we call for full disclosure and complete mandatory transparency of compensation on a proactive basis. That would satisfy our RIMS members' [desire] for complete transparency.

What keeps that from being the norm now?

In my opinion (not RIMS') these fees represent significant income to brokers of all sizes. They argue that buyers are not concerned about their compensation. Many small companies without full-time risk managers or no risk manager may not be aware that the broker is collecting these fees. There is currently no requirement for brokers to disclose the fees. This is a clear conflict of interest.

Without transparency, the buyer really doesn't have any idea of whether or not they are getting a quality product for a quality price.EBA