the insurance broker model

Filed in archive Global Economy on October 25, 2004

Had you ever heard how the business of insurance brokers works? I enjoyed a lesson in the recent Economist issue about this business:

"Few people outside the industry understand either its structure or how it has evolved in recent years. Essentially brokers are classic middlemen. They stand between companies that want to buy insurance and the insurers that sell it, taking a commission for services rendered. But the broker's job is no longer one of simply finding the lowest price. These days brokers help companies to prepare complex evaluations of their insurance needs, often in many different countries. That task requires knowledge of the insurance providers in each local market, but also a good understanding of local risks. Companies' proposals and risk assessments are used by insurers in making their bids; indeed, without the help of a broker many large companies would be unable to solicit meaningful offers from the big insurers. In effect, brokers serve as corporate advisers and form an important distribution channel for insurers. Since the brokers work for both sides, they have, increasingly, been paid commissions by both.

....

As bad as this may seem, the most damning allegation is that Marsh took its desire to steer business to insurers one step further and actually rigged bids. The complaint describes a series of schemes whereby AIG would submit an uncompetitive "B Quote" against a rival's bid at a rate suggested by Marsh. Marsh would then show its customer what were apparently competing quotes, knowing that invariably the rival's cheaper quote would be accepted and that it would later pocket a contingent commission. In return, AIG would be allowed to win business in the future on similar terms."