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Brokers Continue to Cope with Falling Insurance Prices

Source: WSJ

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Posted on 06 Nov 2009

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.


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