Principles and contingents

The Federation of European Risk Management Associations (FERMA) Forum at the beginning of October raised a lot of discussion topics. One of the most interesting of these was the controversy surrounding brokers’ contingent commissions. These are fees paid by insurers, based on the volume and profitability of the business that brokers generate for them.

After high profile coverage in the US in 2005, the world’s three largest brokers agreed to stop taking these commissions. But there are now indications that the US could be reconsidering the ban on the ‘big three’. Reuters reports that the brokers are lobbying US regulators to overturn the ban – not surprisingly as contingent commissions were a very significant income stream.

What I found particularly interesting at the FERMA Forum was the divergence of risk managers’ views on this practice. While some risk managers were firmly opposed to contingent commissions per se, there was a strong contingent that was not too worried because they felt that they could demand transparency from their brokers on remuneration and, anyway, this was an insurance rather than a risk management problem.

While the first assertion may well be true for large organisations, I would certainly argue against the latter one. Contingent commissions are not simply an insurance issue. Any risk manager worth their salt would be concerned if their procurement department told them that they were employing consultants who were taking additional fees from companies that they might recommend.

In my view, this is totally against the European rules on anti-competitive activity. And that makes it a risk management issue. I believe too that it is a moral issue.

Because something has been well established, that does not mean that it is right. I recall the time when insider trading was not an offence. If you were lucky enough to be in the right place at the right time and get some inside information to enable you to invest and make a considerable profit, that was considered OK. Now any director involved in such a transaction would be sued without question.

Whatever you call them, backhanders, bribes or incentives, contingency commissions are an inducement for brokers to recommend certain insurers, possibly to the detriment of their clients. It’s not surprising that there were some notable legal cases and high level resignations four years ago when the issue was first raised.

Do we really want a return to that? And do risk managers want a board enquiry as to how their brokers are remunerated – and why they don’t know?