Insurance Brokerage• Review of the insurance distribution system

• The brokerage business– Background – Recent events– View of a broker

• Scott Strickland• Senior Vice President• Brown & Brown of Washington, Inc.

– Thoughts for the future

Insurance Distribution System - Background

• Independent agents and brokers– Agents– Brokers

• Exclusive agency system

• Direct marketing sales

Insurance Distribution System – Background - 2

• Role of insurance producers – Some stats

• How many producers in the U.S.

• Is it changing

– Personal lines v commercial lines• Agents

• Brokers

Insurance Distribution System – Background - 3

• Insurance distribution– Agent v broker

• The distinction

• Real v theoretical

– What do customers think• Agent v broker

– What do companies think• Agent v broker

Insurance Distribution System – Background - 4

• Who are insurance brokers– There are national and regional firms– Names in the news

• Marsh

• AON

• Willis

• May others large and small

Top 10 U.S. Insurance Brokers and Revenues2003 (generated by U.S. clients)

Rank Company 2003 Revenues*($ millions)

1 Marsh & McLennan Cos Inc $5,250.6

2 Aon Corp. 3,232.5

3 Arthur J. Gallagher & Co. 1,082.2

4 Willis Group Holdings Ltd. 1,022.0

5 Wells Fargo & Co** 800.5

6 BB&T Insurance Services Inc. 604.7

7 Hilb, Rogal & Hobbs Co. 551.3

8 Brown & Brown Inc. 545.3

9 USI Holdings Corp. 352.3

10 Lockton Cos. Inc. 289.1***

Insurance Distribution System – Background - 5

• What is the role of an insurance intermediary– Traditional – Changing role of the intermediary

• Responding to changing customer needs

• Value added services

Brokers’ Involvement in the Insurers’ Value Chain

Source: Swiss Re Economic Research & Consulting; Sigma No.2/2004

Traditional core function of brokers

Services for insurers

Services for policyholders

Product development

Marketing/ sales

Brokers assist in providing data for underwriting

Brokers keep records for policy-holders

Brokers represent policy-holders

Under-writing

Policy issuance/

maintenance

Brokers assist with modeling and actuarial services

Traditional core function of brokers

Sometimes delegated to managing general agents

Frequently delegated to agents/ brokers

Brokers provide DFA, financial modeling services and 3rd party asset management

Brokers provide run-off services for insurers

Asset & Liability management

Claims management

Insurance Distribution System – Background - 6

• How are insurance intermediaries compensated

• Who pays for all this– Commissions– Fees– Special arrangements

• Customers

• Insurance companies

Recent Events -1 • Eliot Spitzer, New York Attorney General

– Investigation into contingent commissions– Charges of bid rigging– Marsh & McLennan Companies– Other companies involved

• AIG

• ACE

• Zurich American Insurance

• The Hartford

• Munich American Risk Partners

Recent Events - 2

• Ending contingent commissions– MMC– AON– Willis

• Refunds of commissions to clients

• Employee terminations

Recent Events - 3• Transparency and disclosure

– What’s important• Cost v benefit

– Industry response• CIAB• RIMS• NAIC• Financial Services

– Sarbanes-Oxley– GLB

Recent Events - 4

• How are agents and brokers regulated– State regulation– Financial services modernization

The Future of Insurance Brokerage

• Some thoughts on changes in the industry– Products and services– Distribution channels – Intermediaries – The economics