Buyers Reassess Position On Contingency Fees

The nation's leading risk manager group, reacting to investigations into possible conflicts-of-interest created by broker contingency fee arrangements with carriers, is reviewing its long-standing acceptance of the practice.

However, it is unlikely that the Risk and Insurance Management Society will change its position from the stand taken in 1999, when a public feud with buyers and regulators over the propriety of such side deals prompted the major brokerage firms to make their fee arrangements public, RIMS officials noted.

“Our statement is that we support transparency, we support communication between broker and client, and we believe that contingent fees are to be disclosed when the client wants information about them, and that the broker ought to provide information that is appropriate for the client,” said Janice Ochenkowski, vice president of the External Affairs Committee for New York-based RIMS.

Ms. Ochenkowski, who is senior vice president of risk management with Jones, Lang LaSalle, a commercial real estate company in Chicago, added that RIMS has provided its members with guidelines on broker compensation through its Quality Improvement Process. Those guidelines include “the risk manager asking about contingent fees and understanding the impact it may or may not have on his client's account,” she said.

The use of contingency fees is under investigation by the California Department of Insurance and the New York Attorney General's Office. (See related story on this page.) At issue is whether contingency deals could result in brokers advising their customers to accept overpriced, unneeded or insufficient coverage from insurers in return for extra fees or higher commission rates.

Although RIMS is reviewing its stand on the issue, “I don't think there is the presumption that we'll need modifications to it,” said Ms. Ochenkowski. “Most of us were comfortable with the general position then, and we're just looking at it to make sure language remains appropriate.”

Lance Ewing, whose tenure as RIMS president ended May 1, said the current investigations “will enhance the dialogue” as to whether there is a conflict of interest. He noted that before making a determination, the risk management community “will need all the information the entire transaction process and the parts the broker and underwriter play in that process.”

Brokers who have disclosed that they have been subpoenaed say that they reveal the fee arrangements to customers, and that contingency payments are a long-standing, accepted practice.

Mr. Ewing, who is vice president of risk management for Caesars Entertainment Inc. in Las Vegas, noted that his company's letter to brokers requires disclosure of contingency fees. “Most risk managers ought to be inserting that into their broker of record letters so that there is full transparency,” he said.

He added that “the onus [for disclosure] should fall on the broker. This 'don't ask, don't tell' type of thing is not good for all three parties the broker, the risk management professional and the carrier.”

He emphasized that carriers are also part of the situation. “If somebody refused to pay those fees, would that have caused a snowball effect, or would they have been standing outside in the cold with not a lot of brokers bringing them the business?” he asked. “I think they need to be part of the conversation as well.”

Several large insurers have publicly denied that they have been subpoenaed in the New York investigation. However, Mr. Ewing thought otherwise and commented: “Obviously they're going to be part of that conversation.”

Nancy Chambers, risk manager for the Waterloo Region Municipalities Insurance Pool in Kitchener, Ontario, who succeeded Mr. Ewing as president on May 1, said RIMS believes transparency is “the only way to have a good, professional relationship with our brokers.”

She said the broker should identify, at a client's request, “the client's insurers with whom they have a contingency or any similar agreement. That way the client can obtain a reasonable estimate of what the contingency revenue is, generated by those agreements,” and apply the latest average contingency factor to the respective premiums.

If the estimate is substantial and if the client requests additional information, “we believe the brokers should calculate the approximate contingency revenues by the carrier and provide the client with the aggregate total of their calculations,” she added.

Reproduced from National Underwriter Edition, April 30, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Buyers Reassess Position On Contingency Fees

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