Travelers Letter To Agents: No Contingent Fees

Travelers has written a letter to agents and brokers emphasizing to them that controversial contingent compensation payments are not part of the company's current fee system.

The company in an open letter to independent agents and brokers, posted on a company Web site accessible only to producers, said it will drop the word "supplemental" when discussing the commission agents receive because it is causing confusion among some who believe it remains a form of contingent compensation.

A copy of the letter was provided by a company representative.

Contingent payments have been in the spotlight ever since an investigation by the New York Attorney General's Office into commercial insurance placements found evidence they served as hidden kickbacks in bid-rigging activity. Subsequent settlements by brokers have included agreements to forego such payments.

The Travelers' letter said it has followed with interest recent commentary on producer compensation, particularly on the company's plan to eliminate contingent compensation.

Its new program, introduced this year, eliminates contingent compensation for all personal insurance and "for all commercial insurance placed through those producers who have elected the new compensation program, which accounts for a significant majority of all our commercial insurance premium," the letter said.

"We now recognize that the program may be misunderstood by some," the letter continued, and went on to explain what the program is.

The letter, dated July 10, was signed by Joseph P. Lacher Jr., executive vice president, personal insurance and select accounts; Samuel G. Liss, executive vice president, strategic development, financial and professional, and international insurance; and John J. Albano, executive vice president, business insurance--all from the Hartford, Conn., office.

Travelers said under its new commission program:

o The commission rate for a policy is fixed at the time the policy is placed. There is no change in the rate by any action the producer or company takes during the policy period.

o The commission rate and amount for any policy can be fully disclosed to the policyholder.

o Commission rates among producers differ based on the historical value of "the relevant business to Travelers."

"The rate is 100 percent fixed at the time the policy is placed and is not contingent or dependent upon any action whatsoever," the letter said.

Travelers said to avoid confusion in the future, it will refer to the program as "a fixed, value-based commission program."

The carrier added that it is not always privy to the details of producer and client relationships concerning fee arrangements.

Generally, Travelers said, it does not pay commissions if it is aware the customer is paying a fee.

The letter went on to say that if the producer or customer feels the payment of the commission "creates an inappropriate conflict of interest," the producer is free to refuse the compensation and agree on alternative compensation arrangements with the customer.

Agent sources with knowledge of the plan, who declined to be identified because they were not authorized to speak for the company, said that where in the past contingent commissions were based upon the growth of the business, now there is no pressure. Instead, the producer's commission rate will in part be determined by the historical profitability of the book of business.

According to one source, an agent may receive a commission base of 15 percent. If the book of business is profitable, it could add another 8-to-10 percent to that commission base.

That commission figure, the source noted, is guaranteed for the period of the contract. The advantage of the program is it allows the agency to do better planning for the future because the agency knows up front how much money is coming into the agency.

It also alleviates pressure to grow individual books of business. The downside is if the business is not profitable, the commission would take a hit on renewal, it was explained.

Last year, both Chubb and Travelers said they would end their practice of paying contingent commissions and instead go to a supplemental commission program.

Chubb has entered into a similar commission payment program, sources said, paying supplemental commissions based on the historical profitability of the business.

The commission scale is not the same for each producer and is negotiated individually, taking into account the variables of historic profitability, according to the sources.