Brouhaha Revived Over Contingency Fees With RIMS, Consumer Group Up In Arms

During recent conference calls with analysts, CitiGroup's Keith Walsh posed a question about the Gallagher agreement to Aon's president and CEO, Greg Case, as well as to Joe Plumeri, chair and CEO of Willis Group Holdings, getting very different responses.

Mr. Case praised Illinois Attorney General Lisa Madigan for lifting the ban, saying he applauded the step she took "as they begin what is really a trend to leveling the playing field for competitors," adding that "even with these steps, there is a long, long way to go in the context of the overall industry."

However, Mr. Plumeri, who was a vocal critic of contingency fees before the investigation by Mr. Spitzer, said that even if New York did end the ban on such fees, Willis would refuse to take them.

"We will not take contingents if that happens," he said. "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 to close 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 has been converted to upfront commissions, and the rest will follow by year's end. 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?" said Mr. Plumeri. "If you take it based upon profits, I think that's a conflict. That makes us charge more to our clients…and therefore we get paid more because we did a deal based upon profits. We don't think that's right."

CONSUMER REACTION

The Risk and Insurance Management Society fears that resuming contingency fees for Gallagher could eventually lead to all large brokers being allowed to accept such payments once more, according to the group's vice president, Terry Fleming.

RIMS, expressing disappointment in the decision by Illinois regulators, condemned insurance brokerage contingent commissions as a "conflict of interest."

"The investigations, admissions and fines that culminated in the agreement signed by some brokers in 2005 prove that these practices can be, and were, manipulated to the detriment of the insurance consumer," RIMS said in its statement.

Mr. Fleming, director of the Division of Risk Management for Montgomery County, Md., told National Underwriter that RIMS suspects "what will happen is that once New York passes its new regulation on transparency and disclosure for brokers to comply with, the New York Attorney General's Office will probably lift the settlement agreements with the 'big three' that they settled with several years ago."

RIMS said it is concerned that the decision to lift the ban on contingent commissions comes without any concurrent proposal by the Illinois Department of Insurance and attorney general to regulate producer disclosure. RIMS strongly urged Gallagher to keep abiding by the compensation disclosure requirements that were part of the 2005 agreement.

Meanwhile, on the personal insurance side, the Consumer Federation of America said transparency is not enough to curb the potential for agent conflict of interest when it comes to weighing service to the customer over increased compensation.

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

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

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 their business when the producer can't give a prospective figure.

"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."

He agrees with RIMS that with the ban lifted in Illinois, pressure will now increase to eliminate it on Marsh, Aon and Willis.

Mr. Hunter praised Mr. Plumeri of Willis 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."