Markel's Conor Finn gauges industry views on how scrutiny by the FSA and Eliot Spitzer have forced brokers' roles to evolve

Chair: Over the last few years we have seen many changes in the way insurance carriers and brokers interact, with brokers' roles brought under increasing scrutiny. How have their roles evolved? Was the only catalyst for change Eliot Spitzer's investigations, or do you believe change was already under way?

Alastair Burns: Change was already under way, much of which had to do with the FSA. The Spitzer episode helped put another overlay on the transparency issue. The other point is that our market changes with each cycle.

As it turns down and starts to soften, margins get squeezed and everyone becomes innovative about how to start to make what we do better.

Julian Taylor: I agree. The move towards full transparency was coming, but Spitzer definitely hastened the process. We're living in a different world now and it will be very important for brokers to more clearly define their services.

The flip side is that once the services are more clearly defined, it will be easier to charge for them. Clients won't necessarily get a cheaper deal but may have to pay more where brokers are currently undercharging.

Frank Murphy: The biggest impact Spitzer has had, when we talk about remuneration, is that he has correctly identified that we are agents of the insured rather than the insurer. This has changed the relationship between the broker and the insurer, particularly with the larger brokers who have placement service agreements, and has benefited the independent brokers, who can now compete on more of a level playing field.

Taylor: That's absolutely right. It's why I'm somewhat cautious about the service agreements into which certain brokers are now entering. These could create conflict, as two agencies would be operating at the same time, one with the client and another with the market with which you've entered into the agreement.

Kevin Fisher: This subject isn't strictly relevant to the reinsurance arena, as we've always had transparency with our client base. The remuneration that reinsurance brokers earn is in the public domain - on the slip - so this issue has less effect on us than our sister company, Marsh, and other direct brokers.

Chair: But is it fair to say that, for everyone sat around this table, the Spitzer investigations and the onset of FSA regulation have polarised us a little bit more and brought the effects of this change more to the fore?

Taylor: There is likely to be some fall-out due to the combination of increased transparency and regulatory costs, which affects all of us.

It will be a case of survival of the fittest, and we will see further consolidation in the broking community. Whether that's good for clients long-term is another question. It's becoming increasingly difficult for new entrants to break into our game, which may stop clients from getting the options and competitive forces they've been used to.

Murphy: I'm pleased the FSA didn't jump on the Spitzer bandwagon, although they were pressured by the 11th Floor at Lloyd's, because regulation is a huge burden on firms of all sizes and we didn't need more distractions.

Michael Faulkner: Referring to Julian Taylor's comments about some brokers being wary of signing up to service agreements, is this why Andrew Beazley's working party has gone quiet and is this symptomatic of the caution that you're talking about?

Taylor: The Beazley working party has had some strong kickback from brokers who are very happy to be transparent - to their clients but not to their market, as has been suggested by the working party. Brokers don't have anything to hide, but they don't trust their markets with that information.

Murphy: Don't forget that 95% of brokers don't have service agreements, and most of them are still more than happy to continue to be remunerated in the way they had been before commission on a transactional basis.

Burns: At Marsh, we are driving at a level of service and service agreement for each of our clients, ensuring the scope of work we are undertaking is clear and that we understand what we are are expected to do. Remuneration is priced on the basis of that clear definition, ensuring we are remunerated appropriately.

Fisher: There seems to be a market view that broker earnings will reduce as part of this process. At Guy Carpenter we are trying to get to grips with the cost of doing business in the London market. We are still handling around 75 years worth of legacy claims - that is an endemic cost in our business. How do we charge for it when it is clearly undercharged at source? We now have an analytical platform with 170 actuaries. We don't charge for this cost, but the research and development is effectively within the service we offer and within our earnings. If we start to strip it out and levy these charges, it becomes a very difficult quantum to reach. To assume you could possibly establish a price that fits all, when the smaller broker doesn't offer these kinds of services, is unlikely and unrealistic.

Burns: You're right. A competitive market place has different platforms, operating on different bases. That's part of your cost differential and ultimately part of your advantage. We've found at Marsh that the traditional concept of a proxy for value being the premium is being replaced by conversations with our clients about the value of our service.

Chair: Does it therefore enable you to provide a more bespoke charging mechanism once you know what clients do and don't value?

Burns: Absolutely. We've found the hardest part is getting the client and brokers to have the conversation. But our brokers tend to find that such conversations invariably bring the client and the broker closer together.

Taylor: Like in the insurance world, many other industries have experienced consolidation, making them more sophisticated buyers. This means they are happy to talk in a more sophisticated way about the services we provide, making for a much better relationship and removal of the uncertainty that the old form of remuneration provided. But in the London market, where 25% of Lloyd's income is made up of binder or facility business, that type of conversation would be totally inappropriate. There can't be one type of remuneration solution for all types of business.

Faulkner: Returning to the service proposition and being able to quantify which services clients do and don't value, does that mean brokers will stop providing certain services?

Taylor: Brokers need to talk to their clients more to understand what they need and try to work in a way that satisfies those needs.

I think it will mean we will have to employ some expensive people to give clients the solutions they want, with the clients having to pay for those people. This has been driven to an extent by the competitive forces in the market that force the brokers who can't satisfy their clients' needs out of business. It will be a challenge for the broking industry.

Faulkner: Julian Taylor mentioned that it is difficult for new market entrants. Do you think this is a shame? At one point the entrepreneurial spirit of the London market could get these new brokers set up very quickly.

Taylor: It's a great shame for the client and it's not good for the dynamism of the market, but it is quite good for those that survive.

Burns: There's a flip side though. With an entrepreneurial environment there are less professional operators moving around in the market. The professional firms among us are devalued by some of the others who don't use the same standards and ethics. If we have a better set of standards, we will be able to better charge for what we do, because it will be a more professional community.

Murphy: I think we will definitely see consolidation rather than breakaways, because it's cheaper, easier and better regulated.

Fisher: I don't believe that this industry is filled with bad practice and bad people. Anything that makes our business become more professional will have a positive effect.

Chair: So overall everybody thinks the changes have had a positive effect, even though there is a painful process to go through. Overall it looks like it's a winner.

Faulkner: Does the removal of contingent commissions mean the next tier down can now start to compete with the top three brokers?

Taylor: Even though we aren't involved with contingent commissions, the Spitzer investigations have tarnished the whole market.

We have to rebuild our reputation again, but we've certainly found that it's easier to compete for business post-Spitzer than pre-Spitzer. So that must be good for the next level down, though it doesn't mean it's easy.

Murphy: The broker adds value by providing the client with more than just the best price.

An insurer can only compete on price.

Chair: You guys all have great reputations, so your clients know what they are getting, what the associated costs are and thus they know exactly what the proposition is.

Taylor: As long as there is a fairly large market to work in, brokers will always be able to add value. Recently a number of underwriters have tried to find ways to source business more directly. This is fraught with difficulties as the more sophisticated clients don't want that type of arrangement - they want a broker between them and the various markets.

Burns: Both brokers and our clients have to get used to certain lines and styles of business being more standard, because the costs basis doesn't support the bespoke activity. We need to accept that we may not be able to do what we have done in the past.

Murphy: More insurers should treat their relationship with Lloyd's brokers as a partnership. Business is hard enough to bring into the London market, so all parties must work together. There aren't enough insurers working on the same team as the brokers.

Taylor: I agree. It's important that the markets and underwriters are available, and not tied up with regulatory issues, because we have to provide quick responses.

Burns: But the market is mixed. There are insurers which take the insurer/broker partnership very seriously.

Fisher: The only thing that differentiates the products offered in the London market is the value of the relationships.

Chair: So, in summary, we agree that the role of the broker was changing pre-Spitzer.

The relationship between brokers and insurers and brokers and insureds has changed for the better, with a better understanding of everyone's needs and appetites.

This environment is a platform for good brokers because the better the broker, the better the relationship with the insured,the better the knowledge of the risk and so the better the price and the product. IT