The recent announcement that Arthur J. Gallagher, one of the world's largest brokers, has received permission to receive contingent commissions from insurers once more was met with both positive and negative comments from within the commercial insurance community.
Insurance brokers are applauding the announcement as a way to level the playing field, but risk managers and their leading association have condemned the development.
Contingent commissions are most often paid to insurance brokers or agents by carriers based on total volume of premiums produced by the broker/agent and placed with a particular carrier.
There are many formulas used–including the quality of the business placed, in terms of losses–but the rationale has been that brokers and agents perform valuable services for insurers, and should be compensated beyond any straight commission they receive for the sale.
Agents and brokers argue that they serve as another marketing channel for insurers. They also perform clerical services for carriers, such as issuing auto ID cards, certificates of insurance, processing invoices and dispensing premiums. Thus, such contingency fees are proper.
This has been going on for a long time, so why the fuss now?
Several years ago, New York's attorney general at the time, Eliot Spitzer, began investigating contingent commissions after brokers and carriers were found to be colluding, fixing prices and steering business to particular insurers in return for the bonus fees.
There was also the claim that contingents are a conflict of interest. This is especially problematic if the broker is paid a fee from clients to be their "independent insurance broker," while also receiving additional monies from an insurer.
Well, it is true that a few bad apples spoil it for the whole barrel. Mr. Spitzer's very public findings forced the largest publicly traded brokers to give up the practice of receiving these contingent commissions.
But not all insurance brokers or agents agreed, especially if they were not involved in the bid-rigging scandal. Most did not give up the practice, and, in fact, most still receive such commissions.
Fast forward to today, with the large brokers claiming that by not being allowed to accept contingent commissions while their smaller competitors do, it creates an uneven playing field.
The Risk and Insurance Management Society and many individual risk managers insist that all brokers should give up these fees. But the bottom line is the bottom line.
With the amount of revenue that agents and brokers receive these days–especially during a relatively soft market and a down economy–there is no way most would be willing to voluntarily give up those additional commissions.
Those brokers that state they will not accept contingent commissions will look to make up the lost revenue in other ways. They will either increase fees or raise their direct commission rate. Any way you slice it, the consumer will be paying these costs.
So what is fair?
Contingent commissions are not new. They have been around forever. I personally have no issue with brokers getting them. They do perform services for insurers that either directly or indirectly benefit the consumer, and I don't think they should be denied compensation for services rendered.
What I do want is transparency and full disclosure of all income generated from my account, and full details of each insurer's compensation agreement with my broker. If any broker refuses to disclose this to you, then find a new broker!
There is no legitimate business reason that they cannot disclose this to you as their client. The fee that your broker receives does in fact ultimately come from you. You as the client have every right to make an informed decision when deciding with whom to do business.
This is a practice and a requirement I have demanded from my brokers as a professional risk manager for many years. In fact, it is a practice that we mandate from every broker my firm places business with on behalf of our clients.
These costs, along with premiums and direct commissions, are components of your Total Cost of Risk. To understand the effectiveness of your risk management program, all the components of your cost of risk need to be identified and managed.
My recommendation is that whomever you have negotiating the insurance for your firm, you should ask your broker to fully disclose all their compensation as a result of doing business with you.
If you are not sure what to ask for or whether what the broker receives is appropriate, you can engage the services of an independent risk management advisory firm to walk you through the process.
No insurance broker is ever independent, nor do they act as your risk manager. They are there to sell you insurance, and they still get fees from insurers–therefore, their opinion is potentially biased.
As they say, caveat emptor! Let the buyer beware!
Richard W. Sarnie, CSP, P.E., is senior vice president and chief operating officer at The ALS Group in Upper Saddle River, N.J. He may be reached at rsarnie@als-uic.com.
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