Dear friend,

Why do brokers bother with this nonsense?

Come to think of it why does the market put up with this nonsense?

What am I banging on about? Well our weekly UK sister magazine Post has unveiled a lot of detail about something that Willis has been supposedly calling ‘Project Camomile’ for its UK retail market business.

The long and the short of it is a flat 2.5% fee on brokered business (we know not whether it is on the gross or the net or payable by the client or the insurer). The charge is to be actively disclosed to Willis clients.

Apparently because it is transparent and non-contingent it doesn’t conflict with the new client-friendly Willis way of doing things.

Apparently a communiqué to staff also said that the 2.5% levy is brokerage, pure and simple.

This only begs the question – what is the point? (and what is remotely simple about it?)

The first law of insurance is that clients want to squeeze brokerage to keep their gross down and insurers want to squeeze brokerage to keep their net up.

Meanwhile brokers want to expand brokerage for obvious reasons.

But a competitive market sorts this out beautifully.

You can sometimes lose business to other brokers who decide to work for less and give their brokerage to the client. Of course you often get that same business back again a couple of years later when they realise that servicing the business is losing them money.

Similarly, we all know that big volume players get bigger discounts. There’s nothing wrong with that — just go to Wal-Mart and see what I mean.

So there’s no reason on earth why a big player like Willis shouldn’t get a bit more brokerage than a small broker — especially if it’s transparent. But why on earth separate your commission out into different silos?

After all, if you get 15% on the deal and 2.5% for your ‘Camomile’ or whatever it is, everyone knows that adds up to 17.5%. Why not just go out and ask for 17.5% straight away? If you need and deserve it, you’re probably going to get it.

In this post Spitzer environment I find it amazing that anyone would bother to do anything otherwise. In my opinion fiddling around will just make your clients suspicious.

And, when you disclose your good fortune to them, what makes you think your clients won’t ask for some of your 2.5% for themselves?

I wrote about this a couple of years ago and rounded off with a story about my old proprietor.

I’ve just remembered another story from when I was working in Madrid in the particularly soft market of the mid-to-late nineties.

A whole posse came round to visit from a world number 1 or 2 reinsurer, practically begging us for income. They looked slightly desperate.

We duly obliged with an offer of a share on a very nice CAR facility. Two days later we got a call:

“Hi Hans, how’s it going?”

“Fine. Look we’d like to take that share on the CAR, in fact we’d actually like a bit more — the only trouble is the brokerage is 32.5%...”

“Yes?”

“…and we are only allowed to give maximum 25%”

“Pity – the client would like you on, but it’s overplaced already.”

Silence.

Another two days later, and another call.

“Hi Hans”

“Hi — look we’ll do you that line on the CAR thing at 32.5% commission”

“Great — but how did you get around your 25% maximum?”

“Oh, we just input 25% commission and 7.5% fees!”

And that, my dear long-suffering friend, is the way the cookie crumbles!

Call it what you like — but if it doesn’t add up it just ain’t happening.