Insurance brokers, speaking to an investors' conference, said they are surprised contingent commissions have not been banned throughout the industry, with one top official saying he cannot understand how a double standard of compensation can exist in such a highly regulated industry.
Indeed, J. Patrick Gallagher, president and chief executive officer of Itasca, Ill.-based insurance broker Arthur J. Gallagher & Co., said he would never have predicted that a "bifurcated market" would exist on commission payments, adding that he does not understand how such a dual market can survive long term.
Mr. Gallagher was referring to the world's four major brokerage firms–Marsh, Aon, Willis and Gallagher–no longer accepting retail contingent commissions after agreeing to settle investigations by state attorneys general (principally New York's Eliot Spitzer) and insurance regulators into alleged abuses.
The brokers allegedly steered insurance contracts to certain insurers in return for lucrative, volume-based contingent commission fees. More recently, several insurers–in order to settle similar allegations by Mr. Spitzer's office–have agreed to end some contingent fee payments to producers.
"I don't see Marsh, Aon, Willis and Gallagher necessarily ever receiving retail contingent commissions again, and I don't know if the rest of the world out there is ever going to have to give them up," said Mr. Gallagher, speaking this week in New York during the financial services firm Keefe, Bruyette & Woods' Insurance Conference.
"This is a very, very unusual situation," he added. "I can tell you that it makes regulators very nervous when you look them right in the eye and say, 'How do you have two sets of rules?' What other industry has two sets of rules? But that is what we are operating with."
While he would not predict the future, he appeared to believe the current situation could not be sustained.
"Those who write, and those who say that it is going to stay this way and there is no risk to the contingent commissions for publicly traded brokers–I'm not so sure I'd say that," Mr. Gallagher remarked.
He believes Mr. Spitzer, Connecticut Attorney General Richard Blumenthal and others want contingent commissions to go away.
A recent agreement between the attorneys general and four major companies created a formula where the carriers will stop paying contingents on some lines of business.
He said while regional carriers may continue paying the fees, should the other major independent agent carriers reach similar agreements with state attorneys general over steering, it could lead to elimination of contingents for 75-to-80 percent of the market.
Martin P. Hughes, chairman and CEO of Chicago-based Hub International, when asked about the subject, said that he thought the bifurcated market would remain.
Under the formula reached with the attorneys general, he explained, where 65 percent of the market is not paying contingents, the carriers would cease paying. The first line where this would happen would probably be personal auto because of the dominance of direct carriers, he noted.
This would cause two things to happen, he suggested:
o One, carriers who have ceased paying contingents would increase their commissions to keep business.
o Second, in lines where contingents have stopped, regional and other strong carriers would probably step in to become dominate players.
Either way, he said, "I don't see this having much of an impact at all" on brokerage business.
For his part, Joseph J. Plumeri, chairman and CEO of Willis Group Holdings–who in the past has made no bones about his dislike for contingents, calling them nothing more than a prop to hold up brokerage earnings–continued to argue that contingents should be banned from the industry.
The upheaval resulting from the loss of commissions was good for Willis, he said, because the company was prepared to work without them and focused on transparency with its clients.
"If we have the choice of keeping contingents or opening the accounts that we have opened, because of the issues that have occurred in the industry, every day I will tell you to forget the contingents," said Mr. Plumeri.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.