New York Attorney General Eliot Spitzer announced today that his office has notified four major insurance companies they can no longer pay controversial contingent commissions to agents and brokers that sell automobile, homeowners and two other insurance products.
His action–a byproduct of settlement agreements insurers made earlier with New York, Connecticut and Illinois to resolve bid-rigging charges–was denounced by agent groups as a "backdoor" move that circumvented legislative process and penalized small producers.
Insurers affected are ACE Ltd., American International Group, St. Paul Travelers Companies and Zurich American Insurance Company.
All entered into settlements earlier this year–which, in addition to resolving charges of bid-rigging, dealt with arrangements to steer clients and what Mr. Spitzer referred to in a statement as "other improprieties related to contingent commissions, a previously undisclosed form of compensation that was found to have led brokers and agents to put their own interests ahead of their clients."
According to the Attorney General's Office, an investigation of insurers and brokerages, which began in 2004, revealed insurers paid contingent commissions to insurance agents and brokers to steer business to the insurers "even when their clients would have been better served by purchasing coverage from other insurers."
Under the settlement agreements, the insurers must change their compensation structure for brokers and agents in any type of insurance where more than 65 percent of the insurance is sold by companies that do not pay contingent commissions.
The insurers also agreed to support legislative efforts to ban contingent commissions.
Mr. Spitzer said today his office mailed the companies formal notice that this 65 percent "tipping point" has been reached for homeowners, personal auto, boiler and machinery, and financial guaranty insurance.
Beginning Jan. 1, 2007, the four companies must stop paying contingent commissions for these insurance products. They have already given them up for excess casualty insurance.
Connecticut Attorney General Richard Blumenthal and Illinois Attorney General Lisa Madigan also joined in the notices to the four insurers.
Wes Bissett, senior vice president for government affairs with the Independent Insurance Agents and Brokers of America, said the ban on contingents is "policymaking by settlement–legislating through the backdoor."
"There's not a single legislature that has banned contingent commissions or even seriously discussed the idea. This is an effective violation of due process rights of agents," said Mr. Bissett.
He added that four companies had acted to reach settlements, but "the agent community is going to pay price at the end of the day."
Contingent commissions, said Mr. Bissett, are completely legal and "have been a win-win for all parties, including the consumer."
He said the agreement "hits independent agents in a particular way and doesn't address compensation that [insurance companies'] captive agents might get." The one positive thing, he said, is that only four companies are involved
Michael D'Arelli, vice president of legislative and regulatory affairs for the Western Insurance Agents Association in Rancho Cordova, Calif., said he has heard from some agent members that they will stop doing business for carriers that drop the commissions.
Hitting the 65 percent level was not unexpected, he said, since many large carriers with captive agents were not paying contingent commissions.
He called the settlements "a shakedown–an abuse of power by attorney generals. There is a legitimate policymaking venue in state legislatures." He said attorney generals threatened that carriers would see falling stock prices if they did not settle, but it was shocking "that carriers would capitulate and put agents under the bus."
"Wrongdoers need to pay for sins and pay dearly, but they asked rest of us to pay the price," said Mr. D'Arelli. "Producers work on a thin margin. They may be getting fat on Wall Street, but they are not getting fat on Main Street."
In New Jersey, the issue of an insurer's agent/broker compensation is the subject of a federal court battle, where agent groups led by the National Association of Professional Insurance Agents have filed suit to void a settlement between Zurich Insurance and regulators concerning producer compensation.
Len Brevik, PIA executive vice president and chief executive said his group "believes that authorities should be prohibited from using their settlement powers to bring about a ban on all contingent compensation."
Main Street agents "are not Mega-brokers," he said adding, "This is an example of settlement powers run amok. Our job is to make sure that this judicial madness does not become a model imposed on the entire insurance industry."
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