NU Online News Service, Feb. 22, 3:45 p.m. EST
The three largest insurance brokers may have won back the right to charge contingent commissions, but those fees won’t reach the same earnings’ levels they once did, Moody’s Investor Service said.
In its Weekly Credit Outlook report, Bruce Ballentine, vice president-senior credit officer for the New York-based rating service, said contingent commissions are expected to “remain a modest component of revenues” for the major brokers–Aon, Marsh and Willis.
He said this is because of the increased awareness of potential conflicts of interest and “the heightened scrutiny on the part of clients and regulators.”
The three brokers were permitted to resume taking contingency payments from insurers last week in an agreement with the New York State Attorney General’s Office and Insurance Department, along with their counterparts in Illinois and Connecticut’s attorney general.
Under the agreement, the brokers will be bound by New York State’s new compensation disclosure regulation which mandates that agents describe their role in the insurance transaction to clients and reveal how they are paid. More detailed information must be provided if the client requests it.
The brokers will also need to maintain compliance and training programs aimed at preventing the abuses uncovered in 2004-2005.
An investigation then by New York authorities turned up evidence that brokers accepted hidden payments as a kickback for steering commercial clients to insurers cooperating in a bid-rigging scheme. As a result the large brokerages were forced to give up the commissions.
Mr. Ballentine said taking contingents may “boost revenues somewhat,” but he noted that Willis has declared it will not accept contingent commissions because of the inherent conflict of interests.
Where accepting contingents may help is in acquisitions of other agencies or brokers in the future, he noted.
Mr. Ballentine said in the report that in addition to increased transparency, the agreement indicates that “the top brokers have achieved the business reforms called for in their regulatory settlements/agreements of 2005.”
Speaking with NU Online, Mr. Ballentine said that it is unlikely that brokers will return to relying heavily on contingent commissions in their business plan as they have in the past because of the perceived conflict of interests and objections some clients might raise.
“They will promote, as they have, the concept of providing good value to clients and providing clear disclosure regarding compensation arrangements,” he said. “That objective and the generally greater disclosures today versus five years ago probably point to lower reliance on contingents.”
Allowing the brokers to accept contingents again will not be a “game changer,” he noted, adding that this will be a “mild positive” for the brokers.