With the broker community under attack, Alex Letts warns against a knee-jerk response

In the fierce and unexpected glare of Eliot Spitzer's headlights, there is understandably a genuine risk that the industry could behave like a startled rabbit. The tendency may be to freeze and then, too late, to try to run.

It is, of course, impossible for outsiders to truly appreciate the hiatus that this assault on the broker community has immediately caused. Just judging by the shockwaves that are ricocheting through the industry, the upheaval is unprecedented. Marsh, Aon, Willis, Ace and AIG have already tabled instant responses. Expect more from them, and further announcements from others.

The real question, however, is this. Will these measures satisfy the blood lust that appears to be coursing through the New York Attorney General's office? Or will they simply be seen as attempts to ride out the storm as opposed to the first measured strides in deep-seated change that is being demanded? (Tellingly, Eliot Spitzer is reported to have said that if a film were to be made of his life, he would want Kevin Costner in his Eliot Ness role in the mafia-busting Untouchables to take the lead ...)

There's no question that the companies already involved are far too smart to have any intention other than to comply with whatever is required. The industry's concern is more focused on how quickly they can actually effect the changes that are being sought.

Equally, do they all agree on what these changes are? It is easy for Mr Spitzer to shoot fish in the barrel by pointing to the need for change but, in truth, his public utterances on the changes he is actually seeking are few and far between. He can argue that it's his role to diagnose the problem and that it is for the industry to create the cure, but what happens if the industry can't agree the cure, or worse, if it does, what happens if Mr Spitzer doesn't agree with it?

The knee-jerk response has been to abandon PSAs (contingency commissions). But what will replace them? Does anyone really expect the brokers to simply kiss goodbye to a revenue stream without seeking to replace it? Can we instead anticipate a broker business model, new in every respect except that it still drives levels of income similar to the golden days of PSAs?

The PSAs however are only half the story (if that). It's the easiest, most obvious fix for the brokers, though indisputably financially agonising. Unfortunately, Mr Spitzer is not on a mission to remove PSAs; rather, the goal is to attack the potential for customers to be overcharged through artifice, misrepresentation and fraudulent practice. The chop firmly clamped in the jaw of this bull terrier is the bone of transparency. By transparency, he does not merely mean transparency of remuneration, but transparency of trading and business process. Fixing transparency of process will cost more than the loss of PSAs, more than the looming fines and settlements. Fixing transparency of process is a task so enormous that it could bring the broker industry to its knees.

The terrifying thing is that many of the issues that Eliot Spitzer will likely point to in terms of potential areas for reform are the same areas that the brokers themselves have been trying to resolve for years. The sad fact is that every effort at reform past and present, has perished on the sword of self-interest. What suited the brokers fell foul of the underwriters or their bureaux and vice versa.

Now, despite the fact that for the first time this is a legal stick beating the change process, what on earth will be agreed, and by whom? Will it be acceptable to the others in the industry? Most of all, will the inevitable compromise satisfy Eliot Spitzer? Given that it's the brokers in the gun sight, the industry may well end up with a broker-driven solution. But, even if, in extremis, the brokers could reach consensus on how and what transparency will suffice, will the underwriters be happy to play by the new rules? What if they say "thanks, but no thanks"?

Taking the initiative

This brings us back to the rabbit in the headlights syndrome. Whilst it may be tempting for each company to swim to the nearest lifeboat and to try to escape prosecution or persecution from Mr Spitzer, by agreeing to whatever he seems to be demanding, this could be the route to disaster.

Despite the appalling pressure on the companies involved and their leaders, collective calmness and a reasoned proposal which is acceptable to all parties are more likely to move the debate on from the current crisis to a new, positive level. The best form of defence needs to be employed, with a return-of-serve that takes the initiative firmly back from a politician sitting in a law office, and restores it to the community that is going to have to live, permanently, with the fall-out.

The questions therefore remain: who will lead this response, who will support it, and what will it be?

Clearly the brokers must lead, and not just the targets of the accusations, but as a united body. And they must prepare a recommendation that is supported, at the very least, by the largest insurers and reinsurers. To proceed without their support will lead to impasse, and impasse will lead to impatience in Downtown New York.

The recommendations will need to be seen to go further than the current scope of debate, more than to merely take the initiative away from Eliot Spitzer. To fail to come up to the mark in this respect would open the industry up to further bullying and external coercion. It must be seen to say: "Enough. We recognise the deficiencies. We acknowledge tardiness in modernisation. And we intend to go deeper and further because we, not the Attorney General, understand how to fix this industry".

The key components to the recommendations need to be as follows:

- Clarification and transparency of remuneration.

- The announcement of a target date for a fully electronic transparent market (T-Day) - again, not some hopeful punt downfield in 2010, but within a reasonable, feasible but urgent time period; 1 January 2007 would seem right. If no deadline is set, Mr Spitzer will not likely rest, and nor will anything meaningful be done. And a drop dead date should be known to mean just that. Fail to comply and you won't be an acceptable business partner.

- The commitment to a simple set of principles for that will be the framework for this transparent market. These will include the roll out of the LMP slip and universal adoption of ACORD or near ACORD standards. It will also embrace signing on-line for direct wholesale insurance and reinsurance and the eradication, finally, of the paper slip.

- The creation of a small global industry body, with funding, to drive through communications (yes, advertising and PR budgets akin to the great privatisation campaigns in the UK in the 1980s - remember British Gas and the Tell Sid campaign?) and to share knowledge and information during the run-up to T-Day.

External commentary at times like this can be irksome. But the imperative now is to beat Mr Spitzer at his own game and, in so doing, to tip the industry over the edge in the modernisation that it knows it so desperately needs. Getting onto the front foot now, with an offensive, aggressive strategy, is the only solution.

Alex Letts is chief executive of electronic trading platform, ri3k.

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