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The Contingent Question

Will renewed spotlight mean more transparency?

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“Contingent commissions–by their nature–create a conflict of interest,” he told participants during the July 30 teleconference. “If I had my way, clients, and not insurers, would compensate brokers.”

Greenberg was the latest industry player to join the discussion sparked by Marsh and Aon Corp., when the brokerages announced they’d resume accepting contingent commissions. Although their statements seem to indicate a return to an earlier era, they didn’t–they simply marked the next stage of a long-running industry practice, say industry experts.

Whether companies or brokers agree with contingents, the industry will likely see more openness and a new transparency about them, according to some.

“We’re seeing the next stage,” says Claire Wilkinson, vice president for global issues at the Insurance Information Institute (III) in New York, noting that contingent commissions are “a long-standing practice” in the industry. “What’s come out of this is some emphasis on disclosure.”

An either/or question?

Although New York’s State Attorney General Eliot Spitzer banned big brokers from accepting contingent commissions in 2004, the practice never really went away. A 2007 A.M. Best bulletin examining contingents pointed out that the issue remained unresolved three years after the Spitzer ban. Some were doing it, some weren’t.

“There were different positions by different companies,” Wilkinson told CITB August 10. “I don’t think there was an all-or-nothing approach.”

That mixed approach appears to stand: even Marsh & McLennan acknowledged that its core U.S. and Canadian brokerages wouldn’t accept contingents, and Aon noted that it would only accept them “where appropriate and legally permissible.”

Even the U.S. Council of Insurance Agents and Brokers (CIAB) skirts an either/or position, but stresses transparency. “The Council’s view on transparency is that brokers should advise their clients of their compensation in the most effective way of their choosing, but a business model should not be imposed upon that process through regulatory, legislative or prosecutorial means,” spokesperson Brianne Mallaghan told CITB via email.

If major brokers are open to the commissions, are insurers on the same page? ACE has clearly reiterated its stance–joining broker Willis Group–while another major company, Chubb, is said to be considering a new approach. During the company’s own second quarter conference call, Chubb COO and vice chairman John Degnan said the company would revisit remuneration practices with major brokers.

The risk for risk managers

But some players are unmoved. “We don’t believe brokers receiving contingent commissions is in the best interest of risk managers or our member companies,” says Scott Clark, director of the external affairs committee at the Risk and Insurance Management Society (RIMS). The practice, he says, “creates potential for conflict of interest and lack of transparency in the insurance purchase transaction.”

Clark told CITB that the society has called on all brokers to commit to not receive the commissions and has ramped up an education campaign for risk managers that will help them “negotiate a full and transparent transaction.”

“Major brokers were stopped from accepting contingents a few years ago,” he points out. “RIMS is saddened to see the provisions lifted.”

The commission context

Players may take different sides, but should keep one thing in mind, Wilkinson says. “Contingent commissions are legal,” she points out. “There was some concern over a small percentage of contingent commissions, and allegations of rigging by larger brokers, but to put all contingent commissions into that bag would be to take it out of context.”

According to Greenberg,  the new contingent commissions landscape remains to be seen. “Regulators in the U.S. … have deemed them acceptable,” he said during the ACE teleconference. “How prevalent they become will be determined by the marketplace. I have no doubt if customers tolerate the use of contingents, their use over time will become more prevalent.”