The brokerage firms that have had to swear off contingent commissions following allegations of kickbacks, account steering and bid-rigging should quit trying to force the rest of the industry to give them up as well because a double standard should exist for those who have violated regulations, one agent association contends.
"This is America, where performance is rewarded, not punished," said Michael D'Arelli, vice president of legislative and regulatory affairs for the Western Insurance Agents Association, based in Rancho Cordova, Calif. "At this time, it would be wise for the large brokers and insurers who have already brought enough shame to the industry to sit down, take their medicine and shut up," he added.
Investigations led by New York Attorney General Eliot Spitzer uncovered evidence of improper conduct and conflicts of interest in the industry, prompting agreements by Marsh, Aon, Willis and Arthur J. Gallagher to give up contingency fees. Such volume-based compensation was blamed for giving brokers an incentive to steer accounts to those who paid the highest bonus incentives.
Mr. D'Arelli's comments came in a statement the association released in response to last week's Keefe, Bruyette & Woods investor conference in New York, during which representatives from the major brokerages caught up in the contingent fee scandal addressed the repercussions.
Willis Chief Executive Officer Joe Plumeri, who spoke at the investor's conference, has championed eradication of all contingent commissions from the industry, saying they are used to prop up earnings by brokers and do not reflect a true sales culture.
J. Patrick Gallagher, president and CEO of Arthur J. Gallagher, voiced his astonishment that a bifurcated market exists that bars a few brokers from receiving contingent commissions, but allows the practice for others.
In response, Mr. D'Arelli said: "Society treats those who break the rules differently from those that follow the rules. There's no double standard there. Some people follow the rules and are rewarded. Some people break the rules and are punished." He went on to say that it appears those who have broken the rules and were punished for it are trying to see that all are punished with the elimination of contingents.
"They are fighting to save their own skin by pulling everyone else down," he said. "It is really sad and unfortunate."
He said those who engaged in improper activities should not be allowed to make the rest of the industry pay for their transgressions. "How could you blacken the eyes of the industry with alleged anti-competitive and bid-rigging activity…and shamelessly attempt to force all other agents and brokers to do the same–in essence pay the price for your bad behavior?" he said. "This is just unbelievable chutzpah."
Willis declined to comment, and Mr. Gallagher was not available for comment as this story went to press.
However, speaking at last week's investor conference, Mr. Gallagher said, "I don't see Marsh, Aon, Willis and Gallagher necessarily ever receiving retail contingent commissions again."
While conceding, "I don't know if the rest of the world out there is ever going to have to give them up," he added that he does not understand how such a "bifurcated market" can survive long term.
"This is a very, very unusual situation," he said. "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."
He suggested that the current situation could not be sustained. "Those who…say that it is going to stay this way…I'm not so sure I'd say that," Mr. Gallagher remarked, adding that he believes Mr. Spitzer, Connecticut Attorney General Richard Blumenthal and others want contingent commissions to go away, period.
Indeed, a recent agreement between the attorneys general and four major carriers created a formula where the insurers will stop paying contingents on some lines of business, under certain conditions.
He said while regional carriers might 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.
However, Martin P. Hughes, chairman and CEO of Chicago-based Hub International, when asked about the subject, said 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 and become dominate players.
Either way, he said, "I don't see this having much of an impact at all" on the brokerage business.
For his part, Mr. Plumeri of Willis–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 such fees 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, forget the contingents," he said.
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