Brokers Challenged To Adapt With New Compensation Incentives

Despite the recent controversy over contingent commissions, consultants believe incentive payments play an important role in the insurance industry in promoting a company's interests and helping a carrier to differentiate itself from its peers.

In a Webcast last week entitled "Contingent Commissions: Growth and Distribution for Insurance Companies," members of Deloitte Consulting discussed contingent commissions and why they remain an important sales tool for the industry.

Howard Mills, chief advisor for the firm's insurance industry group, and former New York insurance superintendent, said the primary concern among regulators when it comes to contingent commissions is transparency.

"Regulators want to know insurers have their client's interests at heart," he said.

Edward S. Koral, senior manager with Deloitte Consulting, said the controversy that developed over contingent commissions following allegations of bid-rigging turned out to be a good thing on one level--it created a healthy dialogue about the purpose of contingents and the service brokers provide.

However, some brokers are still dealing with the loss of contingent fee income as part of settlements with regulators and state attorneys general, which has had a negative effect with the loss of revenues and jobs. Some continue to look at consolidating operations or divesting portions of their firms, he added.

While an unlevel playing field exists, because most brokerages still accept contingency fees, there does not appear to be any move being made to ban such compensation altogether, noted Mr. Koral.

In fact, he said there is evidence that some carriers that once shied away from contingents are now moving back toward the idea. The real challenge is maximizing disclosure and minimizing any pontential conflicts of interest.

"You can find a conflict of interest in anything. It's just a question of how you manage it," he observed.

Contingents are a force for motivation and influencing a carrier's strategic goals, according to Michael Vaccaro, senior manager with Deloitte.

The loss of contingents lessens a carrier's leverage with a producer, and limits a carrier's ability to differentiate itself from its peers, he said. Taking incentives away, he continued, actually hurts the relationship with producers and denies the carrier the ability to "drive strategic behavior in the marketplace."

To compensate, what carriers need to do is develop good, effective incentive plans that do more than give a commission check to an agency or brokerage firm, he said.

Good plans must motivate the sales force to move in a direction that benefits the carrier's market plans, and also have effective means of measuring performance, he noted. The sales force, too, must be able to see and understand the effectiveness of the design, he said.

Outside of financial rewards, insurers may want to consider benefits they can give agents or brokers, such as lead generation or information services that producers could find useful.

Mr. Mills noted that no matter what form of compensation an insurer chooses, regulators will always ask, "what value is created for insureds first. Their first concern is always going to be that of the insured--the consumer. Is the compensation value passed onto the insured? Then they will look at the positive values for the insurers."

Enhanced risk mitigation, better record keeping, policyholder servicing and maintenance of the distribution network are all examples of the services that "the regulatory community would find a positive value in," he explained.

On the negative side, anything that "has the slightest whiff" of driving insurance placement to meet volume targets might be shot down by regulators.

He said while the current compensation playing field is "unfair" because not all brokers are allowed to accept contingency fees, this is the reality of the current situation, and those firms prohibited from that compensation option must compensate, he added.

"Brokers and agents really do serve a very valuable purpose," said Mr. Mills. "It is something that needs to be repeated and stressed because oftentimes it is lost in this debate." He re-emphasized that transparency remains the primary concern of all regulators when it comes to developing a compensation program.

Replays of the Webcast are available through www.deloitte.com.