Willis Turns Down Supplemental Compensation

A major insurance broker said it will not accept supplemental compensation plans offered by some carriers because the arrangements do not avoid conflict of interest.

In a statement today, Willis Group Holdings in New York said the current plans do not avoid the conflict of interest situations that were associated with contingent commissions when they were dropped by the major brokerage firms a few years ago.

Willis said the plans involve performance-driven elements dealing with retention, growth and profitability that were the basis for conflict of interest accusations originally.

“As currently designed, the proposals do not afford a conflict-free environment for the client, and we are not going to take them,” said Joe Plumeri, chairman and chief executive officer, in a statement. He added that the decision was based on principal and not the plan's legality.

The firm did not name the companies involved and a spokesman was unavailable for comment.

The issue goes back to 2004 when then-New York Attorney General Eliot Spitzer began investigating Marsh & McLennan's insurance brokerage unit Marsh over allegations of taking kickbacks, falsification of insurance bids and steering insurance bids to carriers in return for lucrative contingent commissions.

The investigation resulted in the world's four major brokerage firms–Marsh, Aon, Willis and Arthur J. Gallagher–dropping contingent commissions after questions over steering of contracts arose from attorneys general and insurance department investigations. Willis was the first to voluntarily end contingent commissions.

The impact of Willis' announcement, said Bear Stearns' David Small in an analyst's note, is that it would be more difficult for others to accept the payments. He noted that Willis would use the fact it does not accept supplemental commissions as marketing leverage in requests for proposals with clients.

He also noted that insurance broker Hilb, Rogal & Hobbs would benefit from the arrangements because much of its business is agent related. The broker in 2005 entered into an agreement in Connecticut where it would no longer take volume-based commissions but would take commissions based on the book's profitability.

James B. Auden, senior director, insurance with Fitch Ratings in Chicago, told National Underwriter that Willis' decision could have some influence on other brokers and it will be interesting to see if they follow suit.

Mr. Auden said the move may also force insurers to go back to the drawing board and develop compensation plans that avoid the perception of conflict of interest, or the carriers may need to develop separate plans to deal with the broker's concern.

He said the first indication of where this discussion may be headed could be the analyst's conference call next Monday with MMC executives.

Last year insurers Chubb and Travelers said they were going to fix their compensation programs by ending all contingent compensation. They, along with Zurich, ACE and American International Group, entered into deals with attorneys general and agreed to pay hefty restitution and penalty amounts to dispose of accusations of involvement in the contingency fee scandal and other questionable insurance transactions.

Under the agreements, the carriers were to stop paying contingents on certain business where 65 percent of the market does not pay contingents. Mr. Spitzer's office ordered the carriers to stop paying contingents on several insurance products, including auto and homeowners, as of Jan. 1.