By Dan McCue
Staff Writer

The state budget board on Nov. 6 gave a North Carolina company control of South Carolina’s catastrophic windstorm insurance policy, ending the 20-year practice of awarding the contract to the same company without competitive bidding.

The Budget and Control Board’s 5-0 vote departed from the controversial tradition, opting instead to award Willis of North Carolina Inc. a $415,000 contract for broker services to handle a policy some have said could be valued as high as $20.8 million.

The state Insurance Reserve Fund’s longtime broker, Competitive Insurance Group LLC, had submitted a proposal of $500,000 in its bid to handle the contract. Eleven insurance brokers participated in the bidding process.

The board’s action concluded the first competitive bid on the contract in at least 19 years. In addition to Willis and CIG, other bidders for the contract included Marsh USA Insurance, Gallagher Public Entity & Scholastic Division, Davis-Garvin Inc. and Wachovia Insurance Services.

In its winning proposal, Willis Insurance relied on the $20.8 million estimate for the size of the fund and said it thought CIG has received $2.5 million per year in commissions for more than 20 years.

If that number is correct, Willis Insurance’s rate guarantees the state savings of roughly $6.3 million during the life of the contract. Sources close to Gov. Mark Sanford said those numbers are similar to those he relied on in the past when discussing the issue.

But budget board spokesman Mike Sponhour said those numbers are as tenuous as smoke from a flame.

“In this type of brokerage arrangement, the company we contract with works to place portions of the state’s property and casualty insurance with dozens of carriers around the globe, including Lloyd’s of London,” he said. “The cost of placing this reinsurance changes each year depending on global insurance trends which are driven by factors such as the frequency of natural disasters.

“Right now, it’s just not possible to say what the premiums for 2008 will be. So describing this as a $20.8 million fund is incorrect,” Sponhour said. “Early indications are that favorable trends in the insurance market will lead to lower premiums.

“At the same time, because they were being paid a commission, and that commission was included in the total amount of the reinsurance, we have no way of saying how much the broker earned. No one but CIG knows what was paid in commissions by the numerous reinsurers for the current contract.”

Sponhour also disagreed with the assessment of the savings resulting from the new contract. First, he said, there was no standard commission. Moreover, the 10% estimate used by the accountability committee amounts to $1.89 million and not $2.08 million.

“Even if CIG did earn a 10 percent commission, the amount of premiums paid by the IRF has increased over the years so the broker payment it would produce would have been much lower in previous years,” he said. “Two decades ago, the entire reinsurance premium was approximately $2 million, so the broker share at that time would have been some fraction of

that amount.”

Dan McCue is a staff writer for the Business Journal. E-mail him at dmccue@setcommedia.com.

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