Chill Out On Contingencies, Producer Groups Tell RIMS

Agent and broker groups were roundly critical of the Risk and Insurance Management Society's latest stand on producer compensation, suggesting the corporate buyer group was going overboard in its zeal to wipe out contingency plans.

“To condemn an industrywide compensation system solely because of abuse by a few large brokers is to grasp at an easy solution at the expense of the many honest independent agents who offer choice to their customers,” according to Robert Hempkins, president of the Independent Insurance Agents of Texas.

He said the RIMS stance “implies that agents who are contracted with carriers cannot act on behalf of their clients. That is untrue and unfair.”

He added that “if a risk manager is not satisfied with the cost of insurance or the service provided by the broker, then change brokers. There are lots of options in this marketplace.”

While IIAT supports disclosure of compensation arrangements to clients, Mr. Hempkins said that “in the end, insurance buyers should care more about the total cost and the service they are getting from the agent and the carrier. Risk managers who are focused on compensation plans to the exclusion of other aspects of the insurance purchase run the risk of being penny wise and pound foolish.”

He also warned that “loss of contingent compensation would likely increase the cost of insurance to smaller customers.”

“Agents must be adequately compensated for the work they do,” he said. “If contingent compensation goes away, carriers will be forced to pay more upfront commission to their agents. That's a direct sales expense that will immediately impact the cost of the customer's insurance.”

He argued that agent contingent compensation plans involve “a variable based partly on profit of the entire book of business placed with the carrier, not just the experience of one policy. Neither underwriters nor agents think in terms of contingent compensation when quoting business.”

David Nielson, executive director of Sacramento, Calif.-based Alliance of Insurance Agents and Brokers, said that “a clear line must be drawn between legitimate contingency bonuses versus bonuses paid to firms as an incentive for steering business from one insurer to another.”

The Alliance, he said, “agrees that those involved in underhanded deals must be punished. However, regulators, politicians and industry officials must understand this distinction and avoid knee-jerk reactions that punish honest, reliable agents and brokers.”

In a telephone interview, Robert A. Rusbuldt, chief executive officer of the Independent Insurance Agents and Brokers of America, said the association strongly disagrees with RIMS. In a free-market economy, it should be the individual risk manager who decides whether to deal with a broker that takes contingents.

“Those risk managers and chief financial officers will buy insurance based on price, coverage and service,” said Mr. Rusbuldt. “Incentive compensation will not be a determining factor.”

“Incentive compensation is not a conflict,” said Len Brevick, CEO of the National Association of Professional Insurance Agents, in a statement. “The ability of businesses to compensate based upon sales performance is key to how the entire American system of free enterprise operates, not just the insurance industry.”

However, on the issue of transparency, there was universal agreement with RIMS that brokers need to disclose their compensation.

Mr. Rusbuldt remarked that total disclosure “nullifies the conflict if the customer knows the arrangement exists. There is only a conflict if the broker does something not in the interest of the customer.”

However, Mr. Brevick was critical of RIMS for calling for full disclosure when its meetings on the topic were held behind closed doors.

The Council of Insurance Agents of brokers declined to address RIMS' comments directly.

However, a representative for the association said CIAB's position has been, and continues to be that full disclosure of fees is paramount to keeping the trust of clients. So long as brokers practice complete transparency in disclosing the fees–allowing buyers to make informed decisions–there is no need to dispense with them, CIAB said.