IIABA Argues For Contingent Commissions

The Independent Insurance Agents & Brokers of America warned that the attack on a legal and effective compensation system is ongoing and mapped out its opposition to what it feels is an attempt to undermine contingent commission payments.

Responding to recent settlements between state attorneys general and two insurers–Zurich American and American International Group–executives with the Alexandria, Va.-based association said the agreements were backdoor attempts to undermine a sales incentive program that is important to the industry and agents.

“There is a critical need to preserve the right of insurance companies to determine how best to compensate the insurance agents and brokers who sell their products,” Robert A. Rusbuldt, chief executive officer of the Alexandria, Va.-based IIABA, said in a statement. “In this regard, the insurance industry is like virtually every other business distributing products through a sales force.”

He said that most companies want the flexibility to reward strong sales performance as they see fit, including through financial rewards such as incentive compensation.

He added that contingency commissions are widely used because the system is both legal and effective, “and should remain a choice available to insurance carriers. This right is fundamental to the efficient operation of insurance companies in a healthy, competitive, free-market economy,” he said.

The IIABA noted that insurers recognize that agents and brokers must:

o Invest substantial time identifying consumers' wants and needs.

o Understand the complex terms of policies available.

o Assess which products to present.

o Offer choices about coverage, price, service and financial strength of carriers.

o Remain available to assist insureds with questions and policy changes as needed.

The association added that companies also recognize that the investment by agents and brokers provides value well beyond the initial sale by meaningfully enhancing the relationship between the insurance company and the insured. The value of the investment is one of the reasons why insurers in the United States and around the world use a variety of compensation structures, including commission and incentive compensation, to reward sales professionals, the IIABA said.

“The problem uncovered in the insurance industry by legal and regulatory investigations is not the form of compensation,” Mr. Rusbuldt continued. “The problem occurs when there is illegal activity, such as bid-rigging and false quoting, to obtain that compensation. We support the prosecution of such illegal activities. But we oppose restrictions on companies that bar them from making legal payments to their sales force.”

Bill Stiglitz, president of the IIABA and an executive with the Louisville, Ky.-based Hyland, Block & Hyland agency, said that incentive compensation “has been an accepted way of doing business in all industries for centuries. Its use is widespread, with varying structures that take into account productivity and profitability.”

He noted that incentive compensation encourages agents and brokers to become better risk management advisors for insureds, adding that insurance agencies have no way of knowing if they would qualify for incentive compensation from an insurer until after the close of the company's fiscal year. “It is only then that the profitability of the business generated can be determined,” he said.

Mr. Stiglitz said that in a competitive business like the insurance industry, “agents and brokers know that trust and service are crucial to long-term success.”

Mr. Rusbuldt noted that insurers should have the right to decide how to compensate their sales force, including whether to offer and pay incentive compensation within the law. “It should be a right that is preserved to foster a strong competitive insurance environment,” he said.