NU's latest quarterly ethics column focused on the controversy overwhether insurance agents and brokers can continue acceptingcontingency fees from insurers for producing a certain volume orquality of business without creating a conflict of interest betweenwhat's best for their clients against what benefits the agency'sbottom line. Read on for reader reaction and to file your owncomments.

The column was prepared by Peter R. Kensicki, a professor ofinsurance at Eastern Kentucky University in Richmond, Ky., as wellas a member of the Ethics Committee of the CPCU Society. (You mayreach Prof. Kensicki at [email protected].) We thank all of those whoresponded to NU's query, and invite you to continue the dialoguehere on my blog.

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A Question Of Ethics:

Can Contingencies Be Paid
Without Creating Conflicts?

BY PETER R. KENSICKI

For this column, we asked readers to respond to the possibleethical questions raised when producers accept contingentcommissions for delivering a certain volume or quality of businessas part of their compensation from carriers. Are there ethicalmethods of recognizing potential conflicts of interest in producercompensation and, other than prohibiting such bonus feesaltogether, what are some ethical ways of reconciling thoseconflicts?

Given the nature of the questions, responses generally revolvedaround the ethics of contingent commissions and how any potentialconflicts of interest can be ethically treated.

Consistent with previous discussions of contingency fees, thesecommissions and most other forms of producer compensation wereoverwhelmingly considered ethical--although with certainqualifications.

Alternatives to prohibiting bonus compensation were limiting itsapplicability and disclosure.

For example, a claims manager wrote: Additional commissions arecompletely ethical if they are based on a superior book of businessand associated additional profit. They are not ethical if just foradditional commission unless the additional commission is revealedto the customer.

A New York broker split his opinion based on whether theproducer was an agent (representing the insurer) or a broker(representing the insured): Any incentive to a broker that solelyinfluences where a risk is placed is clearly a conflict. The sameis not true for an agent. For brokers, additional compensation hasto be formulated not to influence how a risk is placed in order tobe ethical.

Similarly, a neighboring producer from New Jersey did notrecognize a conflict of interest for agents: Do contingents inducea producer with multiple markets to favor a particular market for aspecific account? I can tell you that the answer to that is NO. Anagent who does not propose the best proposition he can find is notgoing to be in the independent agency business for long.

He added that most insurers are available to a producerscompetitors, and the competitors would rather have the businessthan a contingent commission or [an incentive] trip. This may notbe true for a large broker.

He also commented that he did not have the time to analyze thecontingent commission plans of 40 different companies to see whichone was potentially the best for placement of each account.

Contingent commissions are ethical when based on profitablebusiness, he suggested: Write good risks because it is goodbusiness. Companies that reward that extra effort by payingcontingent commissions are creating no conflicts of interest.

An executive for a residual market insurer that does not pay anyextra compensation also does not see an ethical problem: For thevast majority of risks, the insurance products and prices are allabout the same. In that case, the customer is not hurt and may getbetter service because of the higher income.

In contrast, an Illinois producer believes a potential conflictexists, and that there are four possible sources of the conflictdepending on the basis of the contingent commission--volume, lossratio, persistency, or growth.

If based on volume, it would be unethical to move an account forany reason other than eligibility changes or superior coverage orprice, this producer said, although he believes loss ratio-basedcontingents are ethical, noting: I cannot control who will havelosses. If based on persistencyhow long a carrier keeps anaccount--it may not be ethical to keep an account with a companythat had inferior coverage or excessive price, he added.

Contingents based on growth are no different than regularcommissions, he concluded: If you dont grow with a company, you maynot meet the minimum volume requirement, and you end up moving thebusiness anyway. As long as no one is hurt by growth, it is anethical consideration.

A property underwriter noted: There is no ethical problem if theextra compensation is disclosed, understood and agreed to by theclientespecially if the client has a full-time risk manager.However, if there is an actual conflict created by the extracompensation, I would consider placement an ethical breach.

Another insurance company employee thought that, except forproduction-based contingents, the ethical situation depended on thecomplexity of the coverage and the sophistication of the customer.Production-only bonuses, he believes, should be banned.

With any type of customer, he suggested disclosure would helpsolve the problem, adding that for commercial accounts withsignificant negotiation, total compensation should be included aspart of the deal. Ideally, go to a complete fee system andeliminate commissions paid by insurers altogether, he said.

To protect producers, he suggested what he acknowledged was atime-consuming and expensive solution: Agents and brokers shoulddocument their insurer selection criteria, provide a copy to thecustomer and get the customer to sign the document.

A claims manager from Indiana also suggested that, in additionto disclosure of bonus compensation, the producer should give theclient a signed conflict of interest statement, back away from anyactual conflicts, and perhaps even seek an indemnity agreement fromthe insurer as part of the contingent contract.

To handle any potential conflicts, a risk management consultantnotifies his clients that brokers may receive such bonuspayments--and, if it is of importance to the client, negotiates aformula with the broker as to how the bonus will be included intotal compensation.

Another disclosure suggestion was to disclose compensation inadvance. Dont be shy. Good service is worth it and, if disclosed inadvance, no customer has to worry about what is going on behind hisback.

Another respondent noted that too much time and effort was beingspent on this issue, and suggested that insurers should justincrease regular commissions and skip the problem altogether.

Once again, the vast majority of responders see no ethicalproblem with contingents if disclosed, and if no other problems areassociated with the placement of the business. The most commonmethod of handling this potential conflict, other than avoidance,was disclosure.

Three readers went beyond the compensation issue and offeredsuggestions relative to handling any potential conflict of interestsituation.

An insurance company operations official suggested: Create afilter or a process to evaluate the activity, and be sure it doesnot cross any ethical lines and become an actual conflict. CPCUshave such a filter automatically available to them in the firstline of the CPCU Society Creed: I will use my full knowledge andability to perform my duties to my client or principal and placetheir interests above my own.

He added that anyone in any business can adopt this simplefilter. Another choice would be to check an activity against acompany or personal code of conduct.

An ethics expert paraphrased Rushworth Kidder, a frequentspeaker and author who founded the Institute for Global Ethics in1990: If you only have two options--avoid the potential or disclosethe potential--you have not thought hard enough about thesituation.

This individual suggested analyzing a situation by threemethods--situation, rule or people-based. When examining apotential conflict, ask who will be helped and who will be hurt? Ifno one is hurt, there may be no problem. (However, using thismethod may lead to rationalization and incorrect conclusions.)

The rule-based method simply asks if there are any rules thatapply to the situation. If so, are the rules valid under thecircumstances, or are there unique aspects of the situation thatmake the rule not applicable? If applicable, follow the rule. (Oneproblem with the rule method is occasionally an applicable rulemaybe unfair to those affected.)

The people-based method is a combined restatement of both theCPCU Society Creed and the Golden Rule: Am I putting the interestsof others before my own? Would I expect others to behave in the wayI am going to behave?

The third individual offering a universal process wrote: Itsgreat to examine all decisions based on a method developed by aformer insurance agent, Herbert Taylor, a member of the AmericanNational Business Hall of Fame. His method became famous as TheFour Way Test. While all four of the tests might not apply to theimmediate decision, one will almost always apply and guide you toan ethical action.

A no answer to any of the tests should cause ethicalconcerns:

Is it the truth?

Is it fair to all concerned?

Will it build goodwill and better friendships?

Will it be beneficial to all?

One other method of filtering, suggested in other forums, is toimagine that your decision to a problem will be accurately reportedin your local newspaper. Then ask yourself if you will becomfortable in your business and personal life after the article ispublished.

(So, what do you folks make of this? Post your additionalcomments below.)