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Do you really want to know how brokers earn their money?

Dear Friend,

I must say the whole debate about broker remuneration has made me laugh this week.

Brokers earn brokerage — always have done and always will do. Get rid of one form of brokerage and another will swiftly appear to take its place. If you want a job done, you have to pay for it. So contingent commissions look like they're finally on their way out — it has been decreed — Willis has had its “leadership moment” and that's that!

But anybody who thinks that this is going to alter the fundamental dynamics of the marketplace is severely misguided.

How do you think the brokers managed to squeeze contingent commissions out of (re)insurers in the first place? Market muscle or pure added value are what matters and what have always mattered. Aon, Marsh and everybody else lucky enough to have a strong negotiating position with (re)insurers use that power to secure above-average discounts.

Some of that discount is passed on to the consumer and the rest is extra profit. They are only doing to their suppliers what Wal-Mart and Carrefour do to theirs.

And since this is in the context of a highly competitive market place, what's the problem? If a broker tries to pocket too much brokerage and doesn't pass enough of the discount on to his customer, he risks up losing the account, and all of his brokerage.

Now that “hidden” commissions are going — nothing is to stop Aon, Marsh or Willis going into the market with higher than average brokerage openly displayed on their slips. Good luck to them — if they add enough value or produce enough volume they will deserve every penny!

Brokers make great politicians — after all, they have to be all things to all men — and the parallels are quite striking. On the record all politicians say that they believe open government is a key element of a healthy democratic system — transparency is what it's all about. The general idea is that if the public knows what its leaders are up to, it is much better able to hold them to account. But turn the tape recorder off and the same politicians will tell you that transparency is only a great thing if it shows the people what you want them to see!

Back when I was a broker a great story circulated about an extremely senior executive at my firm who was invited to have lunch with a very senior executive of one of our biggest Blue Chip clients. He was also asked to bring along the slips for the big marine, and non-marine property and liability placements we handled on the client's behalf.

He duly did so and by all accounts, the meeting went really well — until the client asked to see the broking documentation. Cool as a cucumber, our senior executive reached into his briefcase and pulled out photocopies of the slips with the “Brokerage” section blanked out!

Those were the days! That was one senior executive who made sure that our brokerage was not negotiable. He would have preferred to lose the account rather than toss our remuneration into the melting pot at renewal — he saw the amount of discount we passed to the customer as a matter for us and nobody else.

And, transparency or no transparency — the same is still true today.

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