Brokers Continue To Cope With Falling Insurance Prices
November 05 2009 - 5:54PM
Dow Jones News
Commercial insurance prices in the U.S. continue to fall with no
end in sight, say insurance brokers, who are trying to make up for
the impact on their own revenue.
"We have to face the fact that the market is soft and getting
softer," said Brian Duperreault, chief executive of Marsh &
McLennan Cos. (MMC) in a Wednesday interview. Some other regions
are growing, he said, such as Asia and South America, where Marsh,
the company's brokerage business, has a big presence. "We will
focus on that," he said.
Soft insurance prices and companies that are cutting back their
coverage to conserve cash are taking a toll on the biggest brokers,
who all reported lower U.S. brokerage revenue in the third quarter.
Stronger international results and cost-cutting helped. The trouble
is that weakness in the U.S. business won't end anytime soon.
Greg Case, chief executive of Aon Corp. (AOC), sees prices
beginning "to flatten out" in some spots, but he doesn't expect to
see "meaningful movement" in prices before the second half of 2010,
he said last week. Latin America was a strong region in the third
quarter, and the company is adding new services.
Persistently soft insurance prices aren't the only trouble spot
for brokers. There are also complaints by some insurers that some
rivals are setting prices too low and holding the market back even
more.
Duperreault and others brushed off suggestions by some big
insurers that American International Group Inc. (AIG) was slashing
prices on insurance renewals in order to keep business, setting
prices below costs and using its government bailout to cover the
difference.
Joe Plumeri, chief executive of third-largest broker Willis
Group Holdings Ltd. (WSH) called the concerns "overblown."
Duperreault said it would be very difficult for one insurer to
influence the market. "I don't think it is any secret that AIG has
been reducing prices, but so have others," he said. "I think there
is much more going on."
The Government Accountability Office undertook a review of AIG's
pricing and said in a preliminary report in March that it did not
see indications the pricing was out of line. That investigation is
still under way, GAO director Orice M. Williams said Tuesday via
email.
While prices are going down, the largest insurance brokers could
have a new source of revenue soon--but one that poses its own
issues, including possible alienation of major clients.
The three biggest brokers could soon be faced with the tricky
choice of whether to start taking commissions that insurers pay to
brokers based on the volume and profitability of business they
bring in. Policyholders say the payments put the brokers' interest
at odds with their customers' needs. The commissions have been
banned for the top brokers for nearly five years, but they are
expected to be allowed by the end of the year.
The big three brokers split ranks on where they stand on the
potential return of contingent commissions.
Plumeri of Willis said last month that the commissions
contribute to an "erosion of trust," and that Willis won't take
them. Marsh and Aon, the largest broker, have focused on the
unlevel playing field that exists today, where the big three can't
take the commissions, but hundreds of smaller brokers do.
"It is about getting paid fairly, not about contingent
commissions," Case said. "It is about our clients."
"Transparency" with clients was critical, so "they know what we
provide and what it costs," Case said.
Some customers are keeping a close eye on the situation.
Terry Fleming, the director of the division of risk management
for Montgomery County, Md., and vice president of the Risk
Insurance Management Society Inc., or RIMS, said the group would
much prefer brokers not take the commissions, but is willing to
accept the idea if brokers are completely open about the
payments.
-By Lavonne Kuykendall, Dow Jones Newswires; (312) 750 4141;
lavonne.kuykendall@dowjones.com
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