Contingent commissions are either a serious conflict of interest that clouds the insurance buying decision, or they can act as leverage in the carrier-client relationship, according to the conflicting views of two brokers presented here.

The debate was part of a session titled "Insurance Purchasers Speak Up! Your Rights on Contingent Commissions," presented at the Risk and Insurance Management Society's annual conference.

The session was moderated by Deborah Luthi, director of enterprise risk management services for Sacramento, Calif.-based Matheson Trucking Inc. and vice president of RIMS.

Defending contingent commissions was James S. Gault, president and chief executive officer, brokerage services division of Arthur J. Gallagher, and opposing was Donald Bailey, chief executive officer of Willis North America.

Mr. Bailey began the discussion by saying that "it is odd that we have created the exact same environment where we were five years ago," when the major brokers agreed to stop taking contingent commissions.

Under agreements with attorneys general in several states in the midst of a kickback scandal in 2005, the four major brokers–Aon, Arthur J. Gallagher, Marsh and Willis–gave up taking contingent commissions.

Earlier this year those agreements were reversed, allowing them to accept the arrangements. However, not all brokers are taking the commissions, as some have refused them on portions of their business.

Willis has launched a public campaign against contingent commissions on the grounds that they carry an inherent conflict.

Mr. Bailey suggested that part of the reason why the fees were never banned throughout the industry is because of apathy on the part of risk managers, noting that he expected the subject would fill the room to capacity, which was far from the case as the room was less than half full.

Part of the problem, he said, has to do with education, which is why Willis announced a Web site with materials aimed at educating risk managers on the subject. (See related article, page 6.)

Willis has steadfastly refused to accept any contingents on broker business.

Mr. Gault said the issue comes down to client choice, and his firm totally discloses all compensation arrangements to its clients. If the client is uncomfortable with the arrangement, Gallagher will tell the carrier that contingents are to be excluded on that book of business.

"Transparency should be the norm, and customers should know how carriers compensate us," said Mr. Gault.

Mr. Bailey said one advantage for clients is that without contingent commissions, premiums are lower because the built-in cost of those commissions is taken out.

"We have won business on our position on contingents," he noted.

Mr. Gault argued that by accepting contingents, the playing field has been leveled among all brokers. He said Gallagher was previously at a disadvantage when it came to acquisition activity because, for a time, any agency that joined the firm would have had to give up the compensation as part of the transaction.

That disadvantage no longer exists.

The important thing is disclosing all compensation to the client and showing what benefits the client gets from the insurance arrangement and why, said Mr. Gault. "It is about delivering service and doing what is best for our clients."

Responding to questions about contingents, Mr. Gault pointed out that at his firm's brokers have no idea what the arrangements are, that they receive no financial benefit from them, and they do not know how the arrangements would benefit the firm. He also said that having a large book of business with an individual carrier can allow the broker to influence a carrier's decisions to a Gallagher client's advantage.

William J. Kelly, president of WJK Advisory, LLC, and a former president of RIMS, discussed what risk managers should do to control the compensation arrangements.

He noted that the most important thing is to lay out the terms of the arrangement in a well-crafted request for proposal. He added that buyers should give the broker plenty of time to thoughtfully reply to the proposal.

Mr. Kelly pointed to literature RIMS has available to members laying out the different compensation arrangements and what risk managers should do to control that part of the conversation.

In separate news prior to the RIMS meeting, Connecticut Superior Court Judge Kevin G. Dubay, in Middletown, ruled on April 19 that Acordia, now Wells Fargo Insurance, was guilty of deceptive trade practices for not disclosing to its clients a special contingent compensation agreement it had with five insurers. For more details of the ruling, which came after a non-jury civil trial, see "Judge Finds Acordia Brokerage Commission Setup 'Deceptive'" on NU's Online News Service.

Special Reports /

Brokers Face Off Over Contingent Commissions

Related Stories

Recommended For You