The controversy over contingency fees grew ugly this year, with some big brokerages calling for an end to the bonus commissions that got them into trouble with regulators in the first place, and independent agents literally telling their bigger brothers to shut up and take their medicine without penalizing honest producers.

New York Attorney General Eliot Spitzer and his colleagues made headlines last year by striking settlements of bid-rigging allegations against Marsh, Aon and other mega-brokers, including agreements to no longer accept retail contingency fees. Mr. Spitzer had charged crooked brokers of conspiring with selected carriers to rig bids and steer clients to reap the bonus commissions.

Sore over losing a very lucrative revenue stream, a number of top dogs at the big brokerages suggested that regulators would not tolerate a bifurcated compensation system for long, and suggested such fees might best be tossed aside altogether.

The reaction by independent agent groups was fast and furious, and best represented by Michael DArelli, vice president of legislative and regulatory affairs for the Western Insurance Agents Association. At this time, it would be wise for the large brokers and insurers who have already brought enough shame to the industry to sit down, take their medicine and shut up, said Mr. DArelli, who accused the big brokers of unbelievable chutzpah.

They are fighting to save their own skin by pulling everyone else down, he added.

How could you blacken the eyes of the industry with alleged anti-competitive and bid-rigging activityand shamelessly attempt to force all other agents and brokers to do the samein essence pay the price for your bad behavior? he said.

The big brokers weren’t the only ones drawing fire from agents, as a number of major carriers implicated in the bid-rigging scandal signed settlement agreements that included provisions eliminating contingency fees for all producers, if insurers writing 65 percent of the market for a particular line of business no longer offered them.

Such deals also guaranteed that carriers signing on would back any legislative or regulatory attempt to abolish contingencies, which should come into play in at least Connecticut–where the state attorney general announced he might seek legislation banning contingency fees for all producers on commercial lines.

Agents were beside themselves, portraying their sector as victimized by a regulatory overreaction to the limited wrongdoing of a few big brokers.

The fallout really hit home last month, when Mr. Spitzers office announced that ACE, AIG, St. Paul Travelers and Zurich American had all been notified they could no longer pay contingent commissions on auto, homeowners, boiler and machinery, and financial guaranty insurance under the terms of their settlement agreements.

Mr. DArelli lamentedbut wasnt surprised bythe development, noting that his group had warned insurers their settlement agreements were tantamount to throwing their own agents and brokers under the bus

Will producers react by boycotting carriers that dont pay contingencies? Some believe so, but regulators might take steps to crack down on agents if they begin steering clients to insurers just because they still offer bonus feesregardless of whether the bonuses are based on the ultimate quality of business, rather than sheer volume.

The bottom line is that producer groups are in a panic–and for good reason, since the move to eliminate contingency fees is gaining momentum and might prove unstoppable. This despite the fact that not one independent agent has been alleged to have abused the system.
In the end, the big brokers might get their way after all.

Meanwhile, while agents and brokers battled over whether contingency fees should be banned industry-wide, the biggest unanswered questions that were raised earlier this year at the Risk and Insurance Management Society conference remain unanswered:

Where did all those billions in lost broker contingency fees go? Are buyers seeing discounts as a result? If so, how much? If not, why not?

How much will brokers hike their service fees to clients to compensate for the lost contingency fee revenue?

Even if producers disclose all of their compensation, can buyers make heads or tails of complex contingency deals?

Anyone have any answers?