Filed Under:Agent Broker, Agency Management

RIMS Fears All Insurance Brokers Will Get Contingent Fee Okay

NU Online News Service, July 30, 11:35 a.m. EDT

The Illinois action allowing insurance brokerage Arthur J. Gallagher & Co. to resume charging controversial contingent commissions could mean the commission ban will be lifted for other larger brokers, a RIMS executive said.

Terry Fleming, Risk and Insurance Management Society vice president, and Division of Risk Management director for Montgomery County, Md., made the prediction after RIMS issued a statement condemning insurance brokerage contingent commissions as a "conflict of interest."

RIMS said it is disappointed Illinois officials agreed to let AJG resume accepting the fees.

AJG, Marsh, Aon and Willis brokerages agreed to drop the contingent fees in 2005 after a New York state investigation turned up evidence that the lucrative commissions served as a reward for rigging bids and steering commercial insurance clients to certain insurers.

On Tuesday, AJG revealed it had reached an agreement with the Illinois Attorney General's Office and Department of Insurance, that would apply nationwide, to resume accepting the commissions.

RIMS, in its statement released yesterday, said the organization "has consistently stated that contingent commissions should be broadly prohibited as they represent an inherent conflict of interest. The investigations, admissions and fines that culminated in the agreement signed by some brokers in 2005 prove that these practices can be, and were, manipulated to the detriment of the insurance consumer."

Mr. Fleming told National Underwriter today the organization expects that what happened in Illinois could happen in New York and Connecticut for the big three brokers.

He added, "I know the [big] brokers have been complaining that it's an unlevel playing field, because all the other brokers are doing it."

Mr. Fleming said RIMS suspects "what will happen is that once New York passes this new regulation on transparency and disclosure for brokers to comply with, that the New York Attorney General's office will probably lift the settlement agreements with the 'big three' that they settled with several years ago," He added, "RIMS favors a prohibition on contingency fees--across the board--because they represent a conflict of interest."

Mr. Fleming said in a statement that, "we hope that full disclosure of all forms of compensation will be provided to the insurance buyer in a timely manner. This will allow the consumer to determine whether the broker is acting in their best interest, before binding the contract."

A concern, RIMS said, is that the decision to lift the ban on contingent commissions comes without any concurrent proposal by the Illinois Department of Insurance and Attorney General to regulate producer disclosure. RIMS said it has great reservations about lifting the ban on contingent commissions without strong protections for consumers.

RIMS said it strongly urges AJG to continue to use the compensation disclosure requirements that were part of the 2005 agreement.

Historically, RIMS said it has argued that in the absence of a ban on contingent commissions, all forms of compensation--direct and indirect--should be fully disclosed to the consumer as "a crucial component to the relationship between producer and consumer."

RIMS also said it remains troubled the insurance industry promotes compensation practices that can lead to conflicts of interest, maintaining that it hopes for a continued open dialogue between all parties on issues of producer compensation and disclosure.

AJG said its Illinois agreement allows the company to once again accept contingents beginning Oct. 1, which applies nationwide, and contingents are expected to add an estimated $10 million to the firm's earnings in 2011 on an annual basis.

J. Patrick Gallagher, discussing the contingent commissions yesterday, said the fact that all brokers were not required to give them was "dual regulation" and, "we vehemently disagreed that contingent commissions were in any way illegal or immoral. We've said all along that we were willing to give them up if the rest of the industry was going to follow."

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