Insurer Fees Sway Agent Placements, Group Charges

By Mark E. Ruquet

NU Online News Service, Jan. 26, 4 :02 p.m.EST?Evidence suggests that insurers are using contingentcommissions to sway agent's decisions in the placement of personallines insurance, said a leading consumer watchdog group.[@@]

The Consumer Federation of America said a study it performedfound "wide use of troubling contingency fees similar to thosebeing investigated by New York Attorney General Eliot Spitzer."

Washington, D.C.-based CFA contends that the same potentialconflict-of-interest payments the attorney general found that leadto his suit against Marsh & McLennan Companies that alleges itsMarsh brokerage rigged bids and steered unknowing customers toinsurers who made payoffs.

The CFA contends that there are two types of commissions used byinsurers to entice business, steering commissions (commissions paidto attract business to their books), and profit-based commissions(contingents paid to agents for policies that experience low levelsof claims). These payments are made in addition to regularcommissions, CFA said.

"Both types of contingent payments in wide use entice agents todo the wrong thing," said J. Robert Hunter, CFA's director ofinsurance. "Most insurance agents are honest, but if thecompensation system provides an incentive for bad behavior, it islikely to occur."

Wesley Bissett, senior vice president for government affairswith the Independent Insurance Agents & Brokers of Americacalled the CFA report, "a reckless mischaracterization of the wayagents are paid. It totally discounts the service and value thatthey provide."

Mr. Bissett faulted the report for offering no proof of theallegations that agents would fail to file consumer claims tobenefit themselves. He said there is no basis to the assertion thatthere is not competition in the industry.

Competition, he said, is quite intense, and an agent would notrisk losing a customer by steering the account to a more expensiveproduct in exchange for the small percentage of contingent fee theyreceive.

"This reflects one organizations view," said Mr. Bissett. "It ismisguided and uniformed. It does not mean a great deal, it's justunfortunate that they move forward without understanding theindustry."

According to the CFA's report, based on figures compiled fromA.M. Best, the top 20 underwriters' contingent commission feesrange from zero to over two percent.

CFA, in its report asserts that the use of contingentcommissions is a widespread practice for sellers of home and autobusiness. It warns that consumers should be wary of commissionsthat would cause agents to steer them to insurers who charge morethan others for the product.

CFA offers a scenario where "an unscrupulous individual" wouldhold off filing a claim to improve the agents' loss ratio with theinsurer. It says the proper way to encourage loss mitigation isthrough safety assessments of homes or driving safety courses.

Consumers, the report notes, can avoid this potential conflictby dealing with captive agents or direct writers who do not receivecontingent commissions.

The full report can be found at www.consumerfed.org/contingent_commissions_study.PDF.