Exclusive: Australian insurers hit by new charge from Marsh

Major Australian insurers have been slugged with a new charge by broker Marsh, which could see a rise to corporate insurance premiums.

StrategicRISK has learned that Marsh introduced a 2% charge in December, called a ‘distribution brokerage’, for insurance placements for its fee-paying clients.

On a $1m policy, for example, the broker will stand to pocket an additional $20,000 from the insurer, in addition to its client fee for placing the business.

In an email seen by StrategicRISK, Marsh explained that the charge had been introduced because it has an “unusually high percentage” of fee business in its portfolio compared to its competitors.

The distribution brokerage excludes insurance placed through Marsh’s trading platform, MMA, and where client service agreements (CSAs) specifically prohibit Marsh from earning brokerage in addition to the fee that the client pays. But Marsh said it would be asking those clients to reconsider the CSA in “some circumstances” to allow the new charge.

A spokesman for the broker told StrategicRISK that the “charge is fully disclosed to clients and is consistent with structures applied in other parts of the world”.

According to the email, captive placements are excluded from the distribution brokerage, as are life and health placements and workers’ compensation insurances. Reinsurance is in scope, however.

Premiums could rise

Insurers that StrategicRISK spoke to said they were unhappy with the new arrangement.

“But if we want access to the key clients then we have to do it,” one source said.

Others said they may need to factor the 2% charge into their pricing.

“Like any piece of business that you write, you’re trying to write it at a profitable amount so all of these things are factored in,” one source said. “The correct thing to say is that ‘no it doesn’t come in to it’ but the reality is, especially in a soft market, you’ve got to try and make a profit and so all of these things have got to be factored in.”

Another source said: “The entire market is pricing extremely competitively and we have to consider these additional distribution costs into our premium calculation.”

He added that he found the charge “disturbing” and that it was “difficult to see how this move should benefit our clients”.

“The market is critical about it because we all know that once Marsh is successful with it then all of the other [brokers] could follow,” he said.

Risk managers respond

Commenting on the remuneration of brokers and insurers, Scentre Group chief risk officer Eamonn Cunningham said: “I hold to the traditional view that the broker is the agent of the company buying the insurance. As such, only one side of the table should be paying the broker in relation to specific insurance transactions.

“I would be concerned with any suggestion that any fee or other form of remuneration effectively coming from the other side of the table (insurers), which only arises if a specific insurance transaction takes place. This is, of course, as opposed to any other fees or remuneration received by brokers for other services not related to specific insurance transactions.”

A risk manager of a large industrial company added that he was concerned this was a “similar concept to contingent commissions: brokers getting money for placing client business with an insurer”.

“The integrity of the broker to act in the best interest of the customer is so important, and we will want to make sure that that is maintained and upheld with this new charge and doesn’t influence placement behaviour,” he said.

“Brokers have been in a race to the bottom when it comes to client fees and it seems like this is now an attempt to get back some of what they have lost.”

The Insurance Council of Australia said it “considers this to be a commercial matter between the broker and individual insurers”.

A spokesperson for Marsh said: “We advise clients and develop solutions across a range of complex and dynamic risk issues. In order to help them navigate this rapidly-evolving landscape and to invest in current and future client offerings, Marsh Australia has introduced a brokerage charge on transactions where Marsh’s remuneration is fee-based.

”This charge is fully disclosed to clients and is consistent with structures applied in other parts of the world.”