Consumer Group Challenges Personal Line Contingency Fees

The CFA contends there are two types of commissions used by insurers to entice business steering commissions (paid to attract business to the carrier) and profit-based contingency fees (paid to agents for books of business that experience low levels of claims). These payments are made in addition to regular sales commissions, CFA said.

"Both types of contingent payments in wide use entice agents to do the wrong thing," according to J. Robert Hunter, CFA's director of insurance. "Most insurance agents are honest, but if the compensation system provides an incentive for bad behavior, it is likely to occur." He added that the investigation by Mr. Spitzer underscores an anti-competitive culture within the industry.

Wesley Bissett, senior vice president for government affairs with the Alexandria, Va.-based Independent Insurance Agents & Brokers of America, called the CFA report "a reckless mischaracterization of the way agents are paid. It totally discounts the service and value that they provide."

Mr. Bissett faulted the report for offering no proof to back up its allegations that agents would fail to file claims to benefit themselves by improving the loss experience on their books.

He also said there is no basis to CFA's assertion that there is not competition in the industry. In fact, competition is quite intense, and an agent would not risk losing a customer by steering an account to a more expensive product in exchange for the small percentage of contingency fees they receive.

"This reflects one organization's view," he said. "It is misguided and uniformed. It does not mean a great deal?it?s just unfortunate that they move forward without understanding the industry."

"Mr. Hunter's absurd statements about the competitive nature of the property-casualty industry lack any factual basis," added David Snyder, vice president and assistant general counsel for the American Insurance Association in Washington. He said there is plenty of competition, and any constraints are the fault of regulations over price and products. He also said the difference in the amounts paid on commissions reflects different business models and mix of customers.

Leonard C. Brevik, executive vice president of the Alexandria, Va.-based National Association of Professional Insurance Agents, said "there is nothing new or valid" in the CFA study. Mr. Hunter is "entitled to be wrong as often as he desires. He is wrong once again," he added.

"PIA must point out that an incentive bonus that rewards agents for helping their clients reduce risk and suffer fewer losses is not a 'kickback,'" Mr. Brevik continued, adding that such compensation is legal.

According to the CFA report, based on figures compiled from A.M. Best, contingent commission fees among the top 20 underwriters range from zero to over 2 percent. CFA, in its report, asserts that the use of contingent commissions is a widespread practice for sellers of home and auto insurance. It warns that consumers should be wary of commissions that would cause agents to steer them to insurers that charge more than others.

CFA offers a scenario where "an unscrupulous individual" would hold off filing a claim to improve the agent's loss ratio with the insurer. It says the proper way to encourage loss mitigation would be safety assessments of homes or driving safety courses.

AIA's Mr. Snyder called the argument that anyone in the industry would delay the filing of a claim to boost contingency fees an "illogical leap."

The report said that consumers can avoid potential conflicts by dealing with captive agents or direct writers, who do not receive contingent commissions. The full report can be found at www.consumerfed.org/contingent_commissions_study.PDF.

The CFA report comes on the heels of an article in Consumer Reports Magazine, which suggested to readers they could "face bid rigging" if they buy insurance through independent agents.

The piece, which offered no evidence that independent agents were involved in such a practice, also said consumers "may be overpaying for insurance purchased through independent insurance brokerages," noting such agents are paid special commissions for high-volume sales.

The article said consumers "don?t face the bid-rigging problem" if they buy direct from an insurer or through a captive agent.

Industry officials were quick to respond. Cliston Brown, director of public affairs for the IIABA, called it "a mischaracterization" to suggest that consumers can get a better value by going to direct insurers or captive agents. He said this advice "really sells short independent agents and brokers and the value they offer to consumers."

Reproduced from National Underwriter Edition, January 27, 2005. Copyright 2005 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.