The insurance industry was in shock after N.Y. Attorney General Eliot Spitzer dropped his bomb by filing a lawsuit in October against Marsh & McLennan. Spitzer charged the New York-based insurance brokerage firm-one of the largest in the country-with receiving payoffs from carriers for steering commercial business their way, rigging fake bids, and cheating corporate customers out of receiving advice in their best interest.Marsh and others in the industry have since suspended contingent commissions-the questionable payment structure at the heart of Spitzer's case. But no one can say for certain how broker compensation will change as a result of the investigations, which now include other brokerage firms and commercial and health carriers.
Whatever happens, industry sources agree, two words currently stand out in discussions on the topic: disclosure and transparency.
"This is another great example of the (Sarbanes-Oxley) mentality," says John Sarich, industry marketing manager for insurance at FileNet Corp., a Costa Mesa, Calif.-based enterprise content management provider.
"You have to be able to prove and justify your business processes and costs. You have to be able to say, 'This is our revenue, and this is why we know it's our revenue.' You have to be cleaner than clean, whiter than white. That's just the business environment that's out there today."
Demanding answers
"Companies are going to have to be very transparent in working with regulators, and ultimately, with consumers," says Chuck Johnston, director of industry markets, at Callidus Software, a San Jose, Calif.-based enterprise incentive management (EIM) firm.
"Consumers, especially corporate consumers, are likely to start saying, 'I would like to understand how the various parties I'm working with are compensated. Show me how this works.' Right now, if you talk to some carriers, they would have trouble explaining that," he says.
That's because, from a systems perspective, many companies don't calculate commissions correctly the first time, according to Johnston. "There are a lot of adjustments and complexity-particularly for a large broker with a lot of activity. And the audit trails between organizations become very complex." To find out exactly what happened-who paid what to whom-can be very difficult.
As a result, the Spitzer probe into alleged fraud and anti-competitive practices in insurance is pushing the entire industry-even those who have nothing to hide-toward process and technology improvements that enable companies to track and manage compensation more effectively-as well as to disclose those processes and data to regulators when required.
"Good business can withstand scrutiny," according to Ken Crerar, president of the Washington, D.C.-based Council of Insurance Brokers & Agents. "Disclosure is always the best defense against conflict or the appearance of conflict."
In particular, sources say enterprise incentive management (EIM), collaboration technologies and enterprise content management are technologies insurers may find useful in avoiding-or defending themselves against-the kind of scrutiny coming out of Spitzer's office and state insurance departments that have since followed in his footsteps.
Legacy commission systems were often designed to generate the end number for a broker's compensation, but not necessarily to show the work behind those numbers, notes Callidus' Johnston. "A good EIM system can help insurance companies to not only implement a compensation system, but also to see all the elements of that compensation."
For example, a carrier or broker can understand exactly what happened in any given transaction-aggregated across any set of hierarchical relationships, he says. "And, if you need to disclose to regulators or customers exactly what happened at any level of scrutiny, that information is available to you (with an EIM system) as a matter of course."
A clear process
Transparency and disclosure were the two main reasons IE-Engine, a Waltham, Mass.-based human resource cost and procurement management firm, was formed in 1999, according to Brent Bannerman, the company's founder and vice president of business development.
When an employer, consultant or broker uses IE-Engine's online collaboration service to procure employee benefits and insurance, carriers submit detailed bids electronically over the Internet for comparison and analysis, he explains.
This process certifies and authenticates each bid as a legitimate proposal from the carrier, says Bannerman. In addition, all parties have an audit trail for every bid and transaction that occurs in the procurement cycle, actual prices are shown along with detailed quality comparisons for each carrier, and a reverse auction function enables insurers to compete in an open forum.
"Carriers know that their quotes and their offers are being looked at by the end buyer," he adds. "That's really important because the big challenge that brokers and consultants have today-as a result of these indictments and allegations-is being able to illustrate in a very clear, auditable process that they have performed competitive marketing for a client's business."
In addition to proving fair business practices to customers and regulators, some new technologies can also help brokers compensate for the revenue they're losing if contingency fees disappear altogether, says FileNet's Sarich.
Most big brokers already run relatively efficient operations, Sarich says. But if they willingly or forcibly give up contingent commissions, they'll be giving up revenue. Marsh, for example, reported these fees amounted to more than $800 million last year, or 12% of its brokerage revenue of $6.9 billion. "The only way brokers will pick that up is by getting streamlined in the back room," he says.
To that end, enterprise content management can link brokers with underwriters, he says, thereby improving the quoting and marketing processes for new business and renewals.
"They can perform these processes more effectively and literally drain millions of dollars out of the cost cycle. Right now, for instance, most brokers are 'FedEx-ing' stuff every day, he says. "They can eliminate (those deliveries) and do it all electronically."
More governance
Indeed, the Spitzer probe has the potential to take a lot of excess distribution costs out of the insurance market, and in the long run, that will be good for carriers, says IE-Engine's Bannerman.
"This is very good for insurance carriers-and they need to adopt some technologies to make sure they are part of the solution," he says. "But in reality, the solution isn't just technology. It's about adopting protocols-along with a (technology) platform to enable those protocols to be followed."
Those protocols include codes of conduct and behavior-from the way employees perform, to the processes that ensure a company has competed for the business they want, to guidelines on how the company will compete for various products in various markets, he explains.
"This is one of the industries that hasn't had to do what a lot of other industries have had to do already, which is to build a better product and service for less money every year," Bannerman says.
"I always use the example of the automobile industry in the 1980s-how the Japanese came in and built better and cheaper cars," he says. "And look at how GM, Ford and Chrysler adopted a lot of those principles so they could build a better car at a lower price every year. That's what we're talking about here."
E-mail Trail Points To Sloppy Governance
Much ado has been made about the role e-mail has played in N.Y. Attorney General Eliot Spitzer's investigations into fraud and anti-competitive practices in the financial services industry-most recently in his lawsuit against New York-based insurance brokerage firm Marsh & McLennan Cos.
"E-mail creates an electronic trail of information, and if you're Eliot Spitzer, once you get into the database and you've got the time to look at it, you can follow the clues and get all the information," says Robert H. "Skip" Myers Jr., partner in the Washington, D.C. office of law firm Morris, Manning & Martin LLP.
"As we've seen in any number of recent investigations, e-mail can be a terribly obvious form of information, which-for whatever reason-people don't seem to manage with the same scrutiny as they do their written communications."
Indeed, a lot of conversations that used to take place on the golf course are being documented through e-mail, notes Chuck Johnston, director of industry markets at Callidus Software, a San Jose, Calif.-based provider of enterprise incentive management systems. In addition, companies have clear policies and often reviews for paper communication.
"Its much easier to fire off an e-mail with an indiscreet statement," he says. "We're recording the stream of consciousness in business-and our legal community and our business leadership hasn't really understood the implications of this stuff being recorded and externalized."
The industry needs new processes and procedures about how e-mail exchanges should be handled, he adds. "Governance is going to have to be much, much tighter. That's just motherhood and apple pie in the cyber age."
