Contingency Probe Fallout Hurts Many Innocent Bystanders, Producer Groups Say

Mega-brokers Marsh, Aon, Willis and Arthur J. Gallagher all agreed to cease taking any form of contingent commissions. (Later, the agreements were amended to allow the top-three brokers to continue accepting contingencies on surplus lines business they brokered because they were not directly involved with the retail customer in such deals. Gallagher had this understanding in its original settlement.)

Hilb, Rogal and Hobbs–a Richmond, Va.-based insurance brokerage firm–entered into an agreement with Connecticut Attorney General Richard Blumenthal that included giving up volume-based contingent commissions. However, under the agreement, the broker could keep other forms of contingency fees primarily based on profitability of its book of business.

In late December, Mr. Spitzer, along with attorneys general in Connecticut and Illinois, sued Chicago-based insurance broker Acordia and its parent company, Wells Fargo, for allegedly steering clients to certain insurers in return for kickbacks in the form of contingency fees. Acordia said it would vigorously defend itself against the allegations. (See related story, page 7.)

While these agreements each affected a specific brokerage, in 2006 the contingency fee controversy took on a different focus due to individual settlements struck by attorneys general and insurance carriers.

Four major insurers–ACE, American International Group, Travelers and Zurich–all agreed to cease paying contingent commissions when 65 percent of the market in a given line did not pay such bonus fees.

That mark was reached in November, when Mr. Spitzer told the four companies they had to stop paying contingents on homeowners, personal auto, boiler and machinery, and financial guaranty insurance. He was joined by Mr. Blumenthal and Illinois Attorney General Lisa Madigan in issuing the order.

The result of such deals with carriers has only served to punish the overwhelming majority of innocent producers, because the areas of the business–particularly personal lines–impacted by the trigger were not part of the shady deals struck by the major brokerages that prompted the investigations in the first place, noted Robert A. Rusbuldt, chief executive officer of the Alexandria, Va.-based Independent Insurance Agents and Brokers of America.

"It is ironic and somewhat illogical that personal lines was hit with the tipping-test threshold being met," said Mr. Rusbuldt.

While the vast majority of insurance companies will not be affected by these agreements, it was not good public policy for attorneys general to be making regulatory agreements that are the domain of state regulators and legislators, according to Patricia A. Borowski, senior vice president with the National Association of Professional Insurance Agents, the Big I's neighbor in Alexandria, Va.

"This is settlement gone amok and it is out of control," she said, calling the whole arrangement legally defective.

Both agent association leaders pointed out that neither state regulators nor legislators have made a move to ban contingency fees, adding there has been no rise in public opinion demanding an end to incentive compensation practices.

"This [bid-rigging scandal] has mushroomed to affect independent agents and companies in a way that was not foreseen a couple of years ago," said Mr. Rusbuldt, noting that agents are very concerned about where this will eventually lead. "It doesn't seem fair to the average independent agent, and they want to know how–when others were accused of wrongdoing–they got involved in it."

"All of this controversy could have been resolved with rational, open discourse," said Ms. Borowski. "We've been left with a mess, and we have to figure out how to get out of it."

She said the emphasis should have been on improving disclosure and transparency, and not the cessation of contingent commissions–a fairly common sales compensation system that extends well beyond the insurance sector.

What Mr. Rusbuldt finds especially frustrating about the banning of contingents for personal lines is it would be extremely difficult, if not impossible to commit fraud under the system, such as what went on with commercial accounts and the big brokers.

"If someone asked for a kickback on a $400 auto policy quote, the company would think they were out of their mind, and no agent is going to do that for a $40 [commission]," said Mr. Rusbuldt. "It just doesn't work that way at the retail level or that way across America."

In another aspect of this developing story that agents find troubling, both organizations have filed friend-of-the-court briefs opposing the settlement with Zurich–specifically the section on disclosure, contending it opens the door to individual producers being responsible for informing customers of the carrier's disclosure policy. The groups contend it should be the responsibility of the carriers to do that, not producers.

Ken A. Crerar, president of the Washington-based Council of Insurance Agents and Brokers–whose membership includes the mega-brokers–said the emphasis should be placed on defending the free-market system, adding there should be no regulations defining how companies compensate their producers.

"It is a discussion that should be between the regulator, the company and the client," said Mr. Crerar. "That is why transparency is so important."

While he conceded that the decision by individual companies to enter into the settlement agreements was in their best interest, no one realized the national implications. He feels, however, that regulators have not done their job in developing national transparency standards that would have preempted the need for such restrictive agreements.

"We have urged our members to disclose their [compensation] arrangements, but we should not be the one setting standards–the regulators should, and where are they?" he asked. "Not one state has adopted a whole system."

However, when all is said and done, according to Mr. Crerar, this shakeup in the industry might create new competitive opportunities. "Contingents have only been in existence for 25 years," he said. "In a free market, someone will come up with an alternative."

Indeed, Mr. Rusbuldt noted–and Travelers confirmed–that the carrier has told its independent agency force it plans to formulate a new plan to adequately compensate agents for the lost contingents.

"Competition and the free market have a way of mitigating artificial barriers and bumps in the road," said Mr. Rusbuldt. "It is a powerful force."