Broker Contingency Fees Not A Conflict Of Interest
On behalf of the Independent Insurance Agents & Brokers of America, I write in response to issues raised in Editor-in-Chief Sam Friedmans recent commentaries concerning the compensation of insurance brokers. I would like to set the record straight and finally put to rest the suggestion that brokers are acting in a devious, secretive or conflicted manner when compensated by insurers.
Over the last several years, state and federal regulators and law enforcement officials have done an admirable and superb job unearthing illegal corporate and financial scandals. Their actions and ensuing reforms have helped restore confidence to consumers and have put other industries on notice that similar fraud will be punished.
A less favorable side effect has been that some in the media have engaged in feeding-frenzy journalism to identify the next such scandaland, as a result, the practices of some insurance brokers are being improperly tarnished by innuendo, unsubstantiated allegations and hyperbole. Unfounded claims have centered on an important subset of the insurance producer communitybrokers who have placement service or contingent commission agreements with insurers.
Insurance brokers comprise a very small percentage of the nations insurance intermediaries, but they play an important role in the national and international insurance marketplace, and one distinct from that of the typical insurance agent.
Brokers have buyer-service agreements with their business customers, address the interests and particular needs of those clients, and employ their expertise to locate and secure appropriate insurance coverage. These insurance experts customize complex insurance packages and do so almost exclusively for risk managers and sophisticated commercial enterprises.
Brokers may be compensated for their services in a variety of ways, and from both insurance purchasers and insurers, and placement service or contingent commission agreements are common and long-standing forms of compensation.
Under these agreements, an insurer may pay a broker added income if the broker or firms overall book of business achieves predetermined volume- or profit-based objectives within a specified time. These fees, however, are not based on the placement of a particular policy or in connection with any individual buyer, and make up only a small percentage of a brokers overall revenues.
These compensation agreements are permissible under state and federal law, and their receipt neither creates a conflict of interest nor implies that brokers are setting aside the interests of their clients. Despite the unquestioned legality of these agreements, some observers continue to suggest that something is amiss. These critics, however, fail to cite evidence of conflicts of interest and are unable to point to instances where buyers have paid more for insurance, received less favorable policy terms or were otherwise harmed.
Insurance brokers have nothing to hide, and the industry has taken a series of important actions to reassure clients about broker loyalty and avoid even the appearance of improprieties or conflicts. These efforts, launched in earnest in the 1990s, have created a widespread industry practice under which brokers disclose to their clients the existence of compensation agreements with insurers.
Such disclosures help promote transparency, maintain the trust between broker and client, and ensure that insurance buyers are knowledgeable about their brokers compensation.
Despite assertions to the contrary, the broker community has been quite willing to provide clients with this type of disclosure. We believe transparency is vital, and the industry continues to implement and build upon the practices that are commonplace today.
The IIABA is playing an important role in this debate, and this month our board of directors will consider a policy position that affirms the importance of many of the procedures that already exist. That statement will call upon affected brokers to disclose the existence of placement service or contingent commission agreements prior to the placement of insurance coverage, describe the nature of this compensation, and candidly answer all questions from clients.
Proper disclosure empowers insurance buyers and enables them to make informed decisions. Most clients understand this form of compensation and its benefits, and those with concerns have at least two optionswork with their broker to better understand the nature of the compensation, or select another broker.
The insurance industry is highly competitive, and the private market provides buyers with myriad options when they do not approve of the practices of their particular broker.
The possibility of eliminating such compensation agreements altogether also has been raised. In response, I would urge readers to examine the realities of todays marketplace.
Most risk managers and sophisticated buyers who work with brokers recognize the existence of these agreements and comprehend and appreciate their benefits. These arrangements translate into advantages for insurance buyers as brokers are often able to secure more favorable pricing and coverage terms as a result.
They also come at no cost to the client, and their elimination would mean buyers would face increased fees and costs directly from the broker. Eliminating such compensation agreements will do nothing more than hinder the ability of brokers to serve clients in an efficient and cost-effective mannerand that is in no ones best interest.
Thomas B. Ahart, CPCU, AAI, is a past president of the Independent Insurance Agents & Brokers of America in Alexandria, Va., and currently chairs its State Government Affairs Committee. He is president of Ahart, Frinzi & Smith, a Phillipsburg, N.J–based independent agency.
Reproduced from National Underwriter Edition, October 7, 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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