The Center Of Controversy: Are Contingents Used Widely In Personal Lines Policy Sales?

Recently, the Consumer Federation of America released a report on contingent commissions, highlighting the use of such payments among personal lines insurersand meeting with immediate sharp criticism from insurance groups.

There was much truth in statements hidden beneath the rhetoric of both the CFA report and the commentary launched against it. The mission here is not to weigh in on the right or wrong of the conclusions drawn on either side of the controversy.

Rather, since this issue of NU, like the CFA report, presents figures on contingent commissions, it is clear that some readers may try to use the figures presented in our publication to attack or support the Washington-based CFAs analysis.

With that in mind, were providing some reconciliation of the figures in the two publications, background about how the numbers are calculated, and some information about what they tell us, and what they cannot tell us.

(NUs analysis, presented on page 17, was prepared well in advance of the release of the CFA report for publication in this issue. The chart on page 19 was prepared after the CFA report was released to allow readers to reconcile the two analyses.)

Understanding The Numbers

Using annual statement information from the U.S. Insurance product of National Underwriter Insurance Data Services, on page 17, we show direct contingent commissions for the top 25 payers of these types of commissions in 2003. The figures presented (from the Underwriting and Investment ExhibitPart 3Expenses, Line 2.4, Col. (4)) have not been adjusted for commissions assumed or ceded under reinsurance agreements.

For the purpose of this analysis, NU used information for 293 insurance groups (or, more precisely, for combined filers), rather than individual companies.

To provide an indication of how extensive the use of contingent commission is in personal lines, we also show total contingent commissions for 103 groups that we have characterized as personal lines insurers. For each of these groups, 55 percent of the premiums written in 2003 were for personal lines policies. Our analysis shows that direct contingent commissions were 0.6 percent of direct written premiums for personal lines writers and just over 1 percent for commercial lines writers.

Approaching the question more directly, the CFA report analyzes contingent commission ratios for individual insurance companies that were among the largest writers of private passenger auto and homeowners insurance. Unlike NUs analysis, the figures presented in the CFA report are net of reinsurance. Attempting to recreate the CFA analysis, we present both direct and net contingent percentages on page 19 for the top 25 writers of personal auto and homeowners in 2003, based on net written premiums.

We have highlighted four insurance companies specifically referred to in the CFA report for easy reference. The net commission ratios shown in the last column for these four companies match those shown in the CFA report exactly.

(A fifth company mentioned in the CFA report, Zurich American, is not shown. This company, a commercial lines insurer, was not among the top writers of personal lines insurance in 2003. Farmers Insurance, a member of Zurich Group, is a large personal lines writer, but does not use contingent commissions.)

Yes, Insurers That Write Personal Lines Insurance Do Pay Contingent Commissions

According to the CFA report, “a number of the largest sellers of home and auto insurance use contingent commissions.” This statement is clearly true.

It doesnt matter if the analysis is based on direct or net commissions, groups or individual companies. Both the NU and CFA reports clearly reveal that insurers that write personal lines insurance pay contingent commissions to agents.

Northbrook, Ill.-based Allstatethe second largest insurer and the second largest insurance group in the United Statesis the largest payer of contingent commissions. With over 93 percent of Allstates business coming from auto and homeowners business, it seems safe to assume that the company does pay contingent commissions to agents placing personal lines business for Allstate.

Personal Lines Insurers Pay Contingents, But Do They Pay Them For Personal Lines Placements?

Unfortunately, because of limitations of the information available in the annual statements that insurers file with regulatorsthe basis of both the CFA and NU analysesneither analysis reveals whether the contingent commissions shown for a particular insurer or group was paid for by the placement of personal lines insurance.

On page 19, we have indicated the percentage of business that comes from auto and homeowners insurance for each of the top-25 writers of these lines. We note that three of the four insurers highlighted in the CFA reportChubbs Federal Insurance Company, Travelers Casualty & Surety Company, and Hartford Fire Insurance Co.write mostly commercial lines insurance. For each of these companies, at least 60 percent of 2003 net written premiums came from commercial lines.

CFAs Group Analysis

Like NU, the CFA also provides an analysis based on insurance groups rather than individual companies in its report. In both cases, the group reports reveal less about how commissions line up for specific lines of business.

For example, a group analysis shows that net commissions for Berkshire-Hathaway Group are 3.3 percent of premiums. Although 52 percent of Berkshires book is personal lines, this business is almost entirely written by GEICOa direct writer which doesnt pay commissions at all.

Answering The Real Question

The central question raised by the CFA report is whether different contingent commission rates tempt agents to move business in certain directions.

In trying to answer the question, it clearly doesnt matter that GEICO and State Farm pay no contingents, while Allstate and Hartford do. An independent agent cannot offer GEICO or State Farm policies to consumers.

It is also clear that differences in the average contingent commission rates for each company, as presented in the NU and CFA reports, do not provide enough information to draw conclusions about agents motivations. Allstates 1.74 rate, Hartfords 1.67, and Travelers 2.18, after all, are broad averages. They do not represent actual contingent percentages paid to each and every agent for each of the three companies.

The CFA report advises personal lines consumers to ask their agents about the differences in commission arrangements for the companies they represent. Unhappily, this may be an unlikely course for all but the smartest insurance shoppers. But for researchers seeking to discover whether contingency arrangements influence personal lines placements, a similar rigorous approach based on a large sampling of personal lines agents would reveal a clearer answer than annual statement data.

Reproduced from National Underwriter Edition, February 18, 2005. Copyright 2005 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.

Special Reports /

The Center Of Controversy: Are Contingents Used Widely In Personal Lines Policy Sales?

Related Stories

Recommended For You