Contingent Fees Hit By Hunter, Says Transparency No Safeguard

NU Online News Service, Aug. 3, 12:09 p.m. EDT

The Consumer Federation of America has weighed in with criticism of the Illinois decision to allow an insurance brokerage to resume charging scandal-tinged contingency commissions.

Transparency is not enough to curb the potential for conflict of interest agents and brokers may be exposed to when it comes to weighing service to the customer over increased compensation, said J. Robert Hunter, director of insurance for the CFA.

His organization, he said, is very disappointed in Illinois' decision to permit Arthur J. Gallagher to once again collect contingent commissions.

The company was one of four brokerages that agreed to a ban on such fees after a New York State investigation in 2004 found they could serve as kickbacks for participation in a commercial insurance bid-rigging scheme involving major carriers.

"We were very pleased when it appeared that contingent commissions were on their way out, because we think there is an inherent conflict between consumers--whether they are businesses, like RIMS tries to protect, or regular consumers that we try to protect--because it sets up the intermediary in opposition to his client," said Mr. Hunter.

Producers could be tempted to drag their feet making a timely claim, or steer a customer to a more expensive policy based on the contingent set-up, Mr. Hunter suggested. He did not accuse producers of doing this, but said by their nature, contingents can motivate an agent to not act in the best interests of a client.

"It has to be banned; it sets up an automatic conflict," he stressed. "There is a perverse incentive. You can't tell me every agent is perfect and clean."

Itasca, Ill.-based Arthur J. Gallagher announced last week that the Illinois attorney general and insurance department had agreed to allow the firm to once again collect contingent commissions beginning Oct. 1.

J. Patrick Gallagher Jr., the firm's chairman, president and chief executive officer, applauded the decision, saying that officials were finally persuaded that the commissions were not going away and that there should not be a two-tier system of compensation within the industry.

While four major brokerages were forced to accept a ban on the contingency fees by state authorities, other smaller firms were not.

After the Illinois announcement, the Risk and Insurance Managers Society Inc. (RIMS) issued a scathing statement condemning the state's move.

"Illinois slammed shut this cracked door of opportunity to get rid of this thing; slammed it in our face. RIMS felt that way and we do, too," said Mr. Hunter, adding the state is failing to protect consumers.

While Mr. Gallagher said state officials agreed to the changes because the firm has increased transparency, Mr. Hunter dismissed the notion that transparency is sufficient.

"Transparency is a good cover-up for getting rid of real protection," he said. "We'll be transparent while we're ripping you off, but in a very transparent way; [consumers] will never find out."

"It's transparent if you ask the right questions; it's transparent if you're a genius and an insurance expert. But to regular people buying insurance, small businesses and everyone else," transparency does not work, he remarked. "RIMS recognized the conflict; I don't understand why the Illinois insurance department couldn't see it."

With the ban lifted in Illinois, he added, pressure will now increase to eliminate the ban on Marsh, Aon and Willis brokerages.

Transparency works when commissions are set, he said, because it lets consumers know which companies are trying to influence the purchase by the commission they pay. However, it fails with contingent commissions because consumers' cannot understand how much a producer is paid on the business when the producer can't give a prospective figure.

Mr. Hunter praised Willis Group Holdings Chairman and Chief Executive Officer Joseph P. Plumeri for his vocal opposition to contingent commissions.

"I think he is doing the right thing and I applaud him for that," said Mr. Hunter. "I hope [Willis] advertises it out there in their sales pitches."