Did AG Deals Give Back-Door Contingency Fee Ban?

Debra Perkins, an executive vice president for the Independent Agents and Brokers of America, noted that the industry has great respect for the "intellect and savvy of Mr. Spitzer," adding her own assessment that he "likely didn't pull this number out of thin air."

However, Ms. Perkins emphasized the IIABA's belief that contingent compensation "is legal and should be permitted."

For agents and brokers, however, 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. Crerar says.

Through the agreements, Mr. Spitzer and his compatriots "are going through the back door with what they wouldn't or couldn't get through the front [door]," Ms. Perkins complained.

In other words, while agents' and brokers' groups have the political clout to forestall action by state legislators and regulators, attorneys general are immune from such pressure, she suggested.

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.

"It doesn't matter how a broker is paid," Mr. Crerar said. "But it ought to be transparent."

While most agencies collect some income through contingent commissions, Mr. Crerar noted that agencies do not typically count on such income.

Ms. Perkins also pointed out the lesser role contingent compensation plays in typical agency finances.

"Agencies don't run their operations on contingent commissions," she said. Such income, she added, is "speculative," and agents cannot be certain in any given year they would qualify for the additional payments.

For most agents and brokers, Ms. Perkins said, any income from contingent commissions serves as profit. Although few agencies would include an expected amount of contingent income in their annual budgets, she noted that the amount of contingent income earned by agencies "ranges greatly," with some collecting little if any, and others earning larger amounts of money.

"There isn't any standard rule of thumb," she said. "There are no metrics" that can be evaluated across time or the insurance agent community. Instead, she said, contingent income is based on the experience of an agency in a given year, the nature of an agency's book and the carriers it deals with, among other factors.

She also said contingent compensation is uncertain because virtually all agreements include loss experience 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 emphasized that, given its uncertainty, contingent compensation does not play a role in how or with whom an agent places business. "It would be impossible for an agent to place business based on contingent commissions," she said.

The determination of whether or not the 65 percent threshold has been crossed will be made by Mr. Spitzer in the AIG agreement and the attorneys general collectively under the terms of the Zurich agreement, and is to be based on information provided by the National Association of Insurance Commissioners, Oldwick, N.J.-based A.M. Best Co., or an agreed upon third party.

If Zurich or AIG is notified that the 65 percent threshold has been crossed, they would be required to eliminate their contingent compensation programs as of the beginning of the next calendar year. However, if the companies feel the percentage decreases after then, to the point where it falls below 60 percent, they may appeal the issue back to the attorneys general and again offer contingent compensation.

Rather than trying to limit or eradicate contingent commissions, Mr. Crerar said regulators should focus on ensuring clients are made aware of how their insurance agent or broker is being compensated.