The door is open to once again allow the nation's three biggest insurance brokerages to accept contingent commissions after an agreement was reached by the trio with New York, Illinois and Connecticut officials.

However, one of the big-three–Willis–emphasized in two public announcements that despite the agreement with the states, the firm believes contingency fees are bad for the business and was not looking to reestablish such bonus compensation deals.

In addition, the Risk and Insurance Management Society expressed its "dismay" at the turn of events, and urged brokers to go beyond the disclosure requirements set down in the deal to reassure buyers about their integrity.

Under the agreement announced last week, Aon Corp., Marsh & McLennan Companies Inc. (parent company of insurance broker Marsh and reinsurance broker Guy Carpenter) and Willis Group Holdings plc have agreed to abide by the new disclosure regulations that have become the subject of controversy in the New York independent agent community.

The Independent Insurance Agents and Brokers of New York earlier this month announced that the group intends to challenge the New York Insurance Department's producer compensation disclosure rules in court. The rules are scheduled to take effect Jan. 1, 2011. (See NU, Feb. 8/15, for details.)

The new agreement ends the 2005 settlements that barred the country's biggest brokers from accepting contingent commissions and imposed other requirements to ensure that brokers did not engage in the kickback activity that prompted the original controversy, in which brokers were accused of rigging bids with carriers to reap the contingent bonus rewards.

According to filings with the U.S. Securities and Exchange Commission, under the new agreement, the brokers will comply with the New York disclosure regulations and use those same regulations in all states, Washington, D.C., and all U.S. territories.

This will require the brokers to describe their role in the transaction and how they are paid. More detailed information will have to be provided at the client's request.

The brokers will maintain their compliance and training programs aimed at preventing the alleged abuses uncovered in 2004 and 2005.

The brokers are barred from leveraging their clients' business in exchange for "production of business to such insurers." In addition, the brokers agree not to act in any manner contrary to the best interests of the client when placing wholesale business.

The New York Attorney General's Office and the Superintendent of Insurance reserve the right to take action if the brokers fail to meet their obligations under the agreement.

A statement issued by the New York Insurance Department said the amended terms would provide "the transparency necessary to ensure fair and equitable treatment of clients, and prevent a recurrence of the abuses addressed in the original settlement agreement, while allowing the three large brokers access to the same compensation agreements as their counterparts."

The department said the change came after a thorough review of compliance efforts by the three brokers, and reflects a desire by regulatory authorities to provide a level playing field for all insurance producers.

The department noted that the push to end contingent commissions for all intermediaries did not materialize, and this made "it difficult for consumers to easily and accurately compare compensation and incentives, thus distorting the market." This agreement would end that inequity, the department added.

Robyn Ziegler, press secretary for Illinois Attorney General Lisa Madigan, noted that the state's interests only applied to Aon, which is based there.

In an e-mail, she said her office agreed to the modification of the agreement and lifting the ban on contingents, effective Feb. 11, but still requires "complete and transparent disclosure of [Aon's] compensation arrangements with insurers."

She said the investigations by the three states ended the "egregious practices that led to those investigations."

"We have sent a message to the insurance industry that transparent disclosure is the best practice, consistent with the brokers' fiduciary relationship with their clients," she said.

Ms. Ziegler noted that after complying with the terms of the settlement, Aon had been left "at a competitive disadvantage, particularly in this difficult economy," because others still accept contingents.

In lifting the ban, she said the attorney general and insurance department would continue to support moves to require "all insurance brokers and carriers to fully disclose their compensation arrangements to current and prospective clients."

In an analyst's note, Meyer Shields, with the firm of Stifel Nicolaus, said there was no downside to the agreement for the brokers involved, which translates into a drop in expenses for compliance, better competitive positioning, and resumption of collection of some contingents by Marsh and Aon.

In a statement, Chicago-based Aon's president and chief executive officer, Greg Case, said his firm "very much appreciates the moves made toward consistent business practices for all brokers."

However, he added, "our overriding consideration is to act in the best interests of our clients at all times. Aon will continue to lead the industry in terms of delivering value to our clients, including helping our clients fully understand what we do, how we do it, and how we get compensated."

Aon noted that the firm is still bound by settlement agreements it reached with Florida and the National Association of Insurance Commissioners, which strengthens disclosure to clients and has put limits on commissions.

In an e-mail, New York-based MMC said that "Marsh & McLennan is committed to integrity and transparency, and to serving our clients' best interests."

The firm said "the actions by the New York State Insurance Department and the New York Attorney General have helped to restore a level playing field for MMC and other insurance intermediaries. We commend the NYSID and NYAG for applying consistent, mandatory compensation disclosure standards across our industry."

However, Willis said in its statement that unlike the other brokers, the firm entered into its original agreement voluntarily and plans to continue to aggressively push its principals of "trust, transparency and disclosure."

Willis added it has no plans to begin accepting contingent commissions "whether or not our competitors follow our lead."

Before the agreement was announced, Joe Plumeri, chair and CEO of Willis Group Holdings, said in a speech in London that disclosing agent compensation is not enough to eliminate conflicts of interest stemming from contingent commissions.

"Simply telling clients that you are taking contingents does not make it okay," he said last week at an industry forum provided by his brokerage. "It does not change the fact that you have an incentive to act in the interests of someone other than your client, and that when push comes to shove you might not fight for the best deal in the marketplace or advocate fiercely to recover a claim if you know your compensation from the insurer will suffer. It sounds like transparency, but it can never be true transparency," he said.

Mr. Plumeri said he is convinced "the only way to resolve the conflicts inherent in contingent commissions is not to take them. We stopped taking them because we want to be paid for the value we provide our clients, not the insurance companies."

Mr. Plumeri noted that in October 2004, Willis became the first insurance broker to refuse contingent commissions from carriers when working for retail clients. Regulators later reached agreements with three others banning them from taking such commissions, following allegations of bid-rigging. Of the four major brokers that agreed to the ban, Arthur J. Gallagher was permitted to again accept contingents at the end of last year.

"We actually took a big step forward to building trust with our clients when contingent commissions were banned for the largest brokers in 2005," said Mr. Plumeri. "At Willis, we've abolished them, and we're not going back. We're a better company for it."

Citing a lack of public trust in the insurance industry, Mr. Plumeri said a return to contingent commissions would overshadow the integral role that insurance plays in rebuilding lives and business after disaster. "How will we look as an industry if brokers can earn commissions from insurers for giving them business and not for the value we provide to our clients?" he said.

"We're already one of the least trusted industries globally," he added. "People aren't focusing on how we as an industry provide the capital and helped pick up the pieces in San Francisco, Northridge, New Orleans, Cumbria [England] and Lower Manhattan. Instead, they're looking at how we are compensated, and they're not happy, with good reason."

RIMS RESPONDS

The Risk and Insurance Management Society blasted the agreement. "This decision comes on the heels of disclosure requirements that do not afford consumers appropriate protections," the association of big commercial insurance buyers said in a statement.

RIMS added that "the investigations, admissions and fines that led to the 2005 agreements banning such commissions prove that these practices can be, and were, manipulated at the expense of the insurance consumer. Without strong consumer protections in place, RIMS has strong reservations about a policy that permits contingent commissions again, and this development illustrates why RIMS so vigorously fought for a stronger rule."

Scott Clark, director of RIMS' External Affairs Committee, added that "when Arthur J. Gallagher and Company was released from its agreement in Illinois in 2009, RIMS expected that New York would shortly follow suit."

Mr. Clark, who is risk and benefits officer for Miami-Dade County Public Schools, said "RIMS had hoped that in the absence of a contingent commission ban, brokers would be required to provide full compensation disclosure, allowing the consumer to decide whether the broker is acting in their best interest. Unfortunately, the final regulation does not live up to that standard, and instead the burden to request full disclosure has been placed squarely on the consumer."

RIMS in its statement said it "urges Aon, Marsh and Willis to commit to full compensation disclosure above and beyond the recent [New York Insurance Department] regulation. Such action would go a long way toward building trust and strengthening the relationship between broker and purchaser."

RIMS "also reiterates its call that the New York Insurance Department revisit its producer compensation regulation, and open it up to another comment period following the most recent changes."

The group "encourages other states to go further with their regulation and make a strong effort to enact full mandatory disclosure requirements that will protect the insurance consumer."

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