Brokers Defend Contingency Fees Disclosure emphasized; clients best interest remains priority
The heads of some of the country's major insurance brokerages are publicly defending their contingency fee arrangements with carriers in light of New York State Attorney General Eliot Spitzer's subpoenas probing the practice.
David L. Eslick, chairman, president and chief executive officer for U.S.I. Holdings Corp., said the awarding of contingency fees by insurers is a long-standing practice that ultimately helps clients receive the best deal possible.
"What many people are missing is that [contingency fees] recognize the relationship between the agent and the insurer, and the agent's roles and responsibility as the field underwriter for the insurance company, including binding authority and those sorts of items," said Mr. Eslick.
"So it is an item that puts us in the same position as the insurance company, focusing on making sure that business is profitable," he added. "And, by the way, that is critically important to our clients, because if the business we are placing with the carriers is profitable, that gives us great leverage working with those carriers, and exercising to the best extent possible with our clients, in getting [the client] the best deals."
His response, as did the others, came during analyst conference calls to discuss first-quarter results for 2004. (See NU Daily News Service, May 4, at www.NationalUnderwriter.com, for results).
Briarcliff Manor, N.Y.-based U.S.I. has not been contacted by the attorney general's office as part of the investigation of the fees, also known as "placement service agreements," Mr. Eslick said. He noted that the fees are fully disclosed by his firm in its annual report and to clients. "We think it is an important disclosure, and we make sure it is properly disclosed to our customers," he added.
Patrick Ryan, chairman and CEO of Chicago-based Aon Corp., also defended the practice. "We provide valuable services to underwriters that we need to be compensated for, and the underwriters obviously agree," he said. "We feel these agreements are entirely appropriate."
He said that the firm fully discloses its contingency fee arrangements to clients.
Aon is one of four brokers including New York-based Marsh; Willis, headquartered in London; and Kaye Associates, a New York City subsidiary of Hub International Ltd.that announced they had received subpoenas.
Willis CEO and Chairman Joe Plumeri called the investigation "no big deal" for his firm because the fees are not a significant part of earnings and there are no compliance issues.
"It is not something we consider to be significant," he said during an investor conference call. "It is not a big deal. It does not concern us or bother us. It is not a significant part of our business." He repeated the point during a question-and-answer period, adding: "There is nothing going on." He added that the firm complies with all regulations concerning disclosure.
All the brokers who have been subpoenaed said they are cooperating with the investigation.
Critics charge that the practice in which insurers pay brokerage firms an extra fee based on the performance of their book of businesscould mean customers are not directed to the carriers who give buyers the best deal.
The subpoenas from Mr. Spitzer's office were announced by the brokers on April 23. There is speculation that subpoenas were sent to other, privately held brokerage firms and some insurance companies as well, but there has been no confirmation of this. The AG's office would not comment on the investigation.
The California insurance department is looking into the fee system as well.
Reproduced from National Underwriter Edition, May 10, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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