Statement on Industry Compensation and Placement Practices
May 2007

Much has changed since RIMS issued its August 2005 statement on industry compensation and placement practices. In response to regulatory matters and settlement agreements, many brokers pledged to refuse to accept placement fees from insurers on business where they represent the buyer. RIMS applauded this action and supported the prohibition on the use of placement service agreements or other similar arrangements for the entire broker industry. We are disappointed to learn that some brokers are apparently reconsidering their pledge to refuse to accept these fees.

RIMS recognizes that contingent commissions are currently paid on agency generated business, where the agent represents the insurer not the buyer. Such practices have always existed in the insurance markets. However, for brokers and independent agents to accept these fees in transactions that are made on behalf of the buyer represents an inherent conflict of interest. The recent investigations, admissions and fines demonstrate how these practices can be manipulated to the disadvantage of the insurance buyer.

RIMS also recognizes that many smaller, regional or privately held brokerage firms were not part of the various investigations and settlement agreements and have continued to utilize placement service agreements and contingent compensation arrangements. For the reasons listed above, RIMS supports the prohibition of these compensation arrangements for any broker or agent acting on behalf of a buyer. Moreover, RIMS believes that all sources of compensation, direct and indirect, now or in the future, should be disclosed to clients without their request. This disclosure will ensure that the risk manager understands not only the cost of coverage, but any arrangements with specific insurance companies or any fees obtained by the broker/agent from markets approached on behalf of the insured. The existence of compensation arrangements and the amount of potential compensation should be disclosed prior to placement of business and annually by line of coverage. Failure to disclose such arrangements runs counter to the spirit of partnership that risk managers seek to achieve with their brokers, vendors, and insurers.

Furthermore, RIMS is troubled that the insurance industry continues to promote this compensation model despite its many associated issues. RIMS supports a business model for the insurance industry which does not provide for, offer or make available contingent commission arrangements for the brokerage industry.

RIMS advocates for an open dialogue among all parties on all issues of compensation, as well as all other aspects of the insurance transaction. RIMS believes that broker compensation and insurer selection should be governed by the principles of complete transparency and full disclosure without client request. Only then can risk managers make full and informed decisions as to which coverage and method of placement is best for their organizations.

Risk managers must evaluate the level of transparency and full disclosure in their broker relationships. To effect change, risk managers must vocalize their concerns and hold their providers accountable.