NU's latest quarterly ethics column focused on the controversy over whether insurance agents and brokers can continue accepting contingency fees from insurers for producing a certain volume or quality of business without creating a conflict of interest between what's best for their clients against what benefits the agency's bottom line. Read on for reader reaction and to file your own comments.

The column was prepared by Peter R. Kensicki, a professor of insurance at Eastern Kentucky University in Richmond, Ky., as well as a member of the Ethics Committee of the CPCU Society. (You may reach Prof. Kensicki at [email protected].) We thank all of those who responded to NU's query, and invite you to continue the dialogue here 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 possible ethical questions raised when producers accept contingent commissions for delivering a certain volume or quality of business as part of their compensation from carriers. Are there ethical methods of recognizing potential conflicts of interest in producer compensation and, other than prohibiting such bonus fees altogether, what are some ethical ways of reconciling those conflicts?

Given the nature of the questions, responses generally revolved around the ethics of contingent commissions and how any potential conflicts of interest can be ethically treated.

Consistent with previous discussions of contingency fees, these commissions and most other forms of producer compensation were overwhelmingly considered ethical--although with certain qualifications.

Alternatives to prohibiting bonus compensation were limiting its applicability and disclosure.

For example, a claims manager wrote: Additional commissions are completely ethical if they are based on a superior book of business and associated additional profit. They are not ethical if just for additional commission unless the additional commission is revealed to the customer.

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

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

He added that most insurers are available to a producers competitors, and the competitors would rather have the business than a contingent commission or [an incentive] trip. This may not be true for a large broker.

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

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

An executive for a residual market insurer that does not pay any extra compensation also does not see an ethical problem: For the vast majority of risks, the insurance products and prices are all about the same. In that case, the customer is not hurt and may get better service because of the higher income.

In contrast, an Illinois producer believes a potential conflict exists, and that there are four possible sources of the conflict depending on the basis of the contingent commission--volume, loss ratio, persistency, or growth.

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

Contingents based on growth are no different than regular commissions, he concluded: If you dont grow with a company, you may not meet the minimum volume requirement, and you end up moving the business anyway. As long as no one is hurt by growth, it is an ethical consideration.

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

Another insurance company employee thought that, except for production-based contingents, the ethical situation depended on the complexity 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 help solve the problem, adding that for commercial accounts with significant negotiation, total compensation should be included as part of the deal. Ideally, go to a complete fee system and eliminate commissions paid by insurers altogether, he said.

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

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

To handle any potential conflicts, a risk management consultant notifies his clients that brokers may receive such bonus payments--and, if it is of importance to the client, negotiates a formula with the broker as to how the bonus will be included in total compensation.

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

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

Once again, the vast majority of responders see no ethical problem with contingents if disclosed, and if no other problems are associated with the placement of the business. The most common method of handling this potential conflict, other than avoidance, was disclosure.

Three readers went beyond the compensation issue and offered suggestions relative to handling any potential conflict of interest situation.

An insurance company operations official suggested: Create a filter or a process to evaluate the activity, and be sure it does not cross any ethical lines and become an actual conflict. CPCUs have such a filter automatically available to them in the first line of the CPCU Society Creed: I will use my full knowledge and ability to perform my duties to my client or principal and place their interests above my own.

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

An ethics expert paraphrased Rushworth Kidder, a frequent speaker and author who founded the Institute for Global Ethics in 1990: If you only have two options--avoid the potential or disclose the potential--you have not thought hard enough about the situation.

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

The rule-based method simply asks if there are any rules that apply to the situation. If so, are the rules valid under the circumstances, or are there unique aspects of the situation that make the rule not applicable? If applicable, follow the rule. (One problem with the rule method is occasionally an applicable rule maybe unfair to those affected.)

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

The third individual offering a universal process wrote: Its great to examine all decisions based on a method developed by a former insurance agent, Herbert Taylor, a member of the American National Business Hall of Fame. His method became famous as The Four Way Test. While all four of the tests might not apply to the immediate decision, one will almost always apply and guide you to an ethical action.

A no answer to any of the tests should cause ethical concerns:

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 to imagine that your decision to a problem will be accurately reported in your local newspaper. Then ask yourself if you will be comfortable in your business and personal life after the article is published.

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