Brokers React To A.J. Gallagher Getting Contingents Back

NU Online News Service, July 30, 3:57 p.m. EDT

The announcement yesterday that Arthur J. Gallagher will be allowed to collect contingent commissions again starting Oct. 1, was met with a measure of approval by two of the three major insurance brokers who are currently barred from taking them.

Two of the brokers appeared to endorse an eventual return to the contingent commission compensation scheme, which they agreed to give up after a New York State investigation by then Attorney General Eliot Spitzer turned up evidence the lucrative commissions were kickbacks for steering commercial clients to insurers.

While regulators had four major brokers agree to forego the contingency commissions, smaller companies faced no such requirement.

Dan Glaser, Marsh's chairman and chief executive officer commented in an e-mail that his brokerage "has consistently advocated for a level playing field. Marsh continues to believe that the settlement agreements should sunset and that a clear set of rules grounded in transparency should apply equally to all insurance producers."

During conference calls today with analysts, Keith Walsh, with Citi, posed a question about the agreement to Chicago-based insurance broker Aon's Greg Case, the firm's president and CEO, and to Joe Plumeri, chairman and CEO of Willis Group Holdings.

Mr. Case praised Illinois Attorney General Lisa Madigan for the change, saying he applauded the step she took "as they begin what is really a trend to leveling the playing field for competitors."

For Aon, he said the issue is less about the commissions themselves but more about transparency "and a level playing field for all competitors."

"Even with these steps, there is a long, long way to go in the context of the overall industry," he said.

The major issue is providing value to the client and delivering the highest value for the price, he observed, adding that the attorney general's action is "a good step toward transparency" and creating a level playing field.

Joe Plumeri, chairman and CEO of Willis Group Holdings, who was a vocal critic of contingent commissions before the investigation by then New York Attorney General Eliot Spitzer, said if the New York Attorney General did end the ban on contingents, Willis would refuse to take them.

"We will not take contingents if that happens," said Mr. Plumeri. "But by the same token, I want everybody to understand that doesn't mean I don't expect to get paid."

He noted that in last year's acquisition of insurance broker Hilb, Rogal & Hobbs, Willis accepted that firm's contingent agreements in order to do the deal. He said it was done with the understanding those agreements would be converted to upfront commissions as soon as possible.

Mr. Plumeri said 90 percent of $40 million in contingents was converted to upfront commissions and the rest by the end of the year. He added that the level of compensation has not changed.

"The issue is do you get paid two, three, or four, or whatever percent it is, that you get paid on an upfront, negotiated, proper deal with an insured, or do you take it based upon profits, or do you take it based upon volume?" remarked Mr. Plumeri.

"If you take it based upon profits, I think that's a conflict. That makes us charge more to our clients; that makes the insurance companies make more money, and therefore we get paid more because we did a deal based upon profits. We don't think that's right," he said.

One strong reaction came from the Risk and Insurance Management Society, which said today it fears the Illinois action is the first step to seeing the contingent commission ban fee lifted, something that would once again promote the manipulation of insurance placements (see NU Online, today, "RIMS Fears All Insurance Brokers Will Get Contingent Fee Okay").