Insurance agent and broker organizations are expressing concern that attorneys general are thwarting the legislative process by seeking to bar their contingency compensation arrangements through civil actions.
They note insurers' recent consent to settlements designed to cut back on contingent commissions. Those settlements concluded civil suits by New York Attorney General Eliot Spitzer after investigators found some hidden fees and commissions were used by insurers to reward brokers collaborating in commercial insurance bid-rigging schemes.
American International Group and Zurich America have signed agreements with a number of states including New York, Illinois and Connecticut that under certain conditions could eliminate their payment of contingency commissions to brokers.
The carriers agreed to drop the payments where other insurers generating gross written premiums amounting to 65 percent of any insurance line decide to eliminate such commissions through settlement or voluntarily.
Whether or not the threshold will be crossed, and what, if any lines will be affected remains unforeseen, but the agent and broker groups are concerned that Mr. Spitzer and other state officials, who have uncovered abuses involving contingent commissions, want to eliminate them at least on some insurance lines.
"Clearly they didn't pull these numbers out of a hat," said Ken Crerar, president of the Council of Insurance Agents and Brokers.
Debra Perkins, an executive vice president for the Independent Agents and Brokers of America, had a similar assessment. However, Ms. Perkins emphasized the IIABA's belief that contingent compensation "is legal and should be permitted."
Mr. Crerar said, however, that for agents and brokers the issue may not be the effect on contingency commissions specifically, but the notion that "one state is focused on defining the model of compensation" to be enacted across the country.
Mr. Spitzer and other attorneys general "are going through the back door with what they wouldn't or couldn't get through the front," Ms. Perkins said, suggesting that legislation to curtail commissions would be thwarted if it came up for a vote in a state legislature.
Although the National Association of Insurance Commissioners has adopted a model rule on the issue, Mr. Crerar noted that it has not yet been passed by a single state.
He opined that how a broker is paid doesn't matter, although he said the details of the payment "ought to be transparent."
While most agencies collect some income through contingent commissions, Mr. Crerar noted they typically do not count on such income.
Ms. Perkins stated, "Agencies don't run their operations on contingent commissions." Such income, she added, is "speculative," and agents cannot be certain in any given year they would qualify for the additional payments.
Ms. Perkins also said contingent compensation is uncertain because virtually all contingent agreements include the loss experience for the year among the variables used to determine if an agent has qualified for additional compensation.
"Agents don't control what the loss experience is for any line of business," she added.
Rather than trying to limit or eradicate contingent commissions, Mr. Crerar said regulators should focus on ensuring that clients are made aware of how their insurance agent or broker is being compensated.
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