Dinallo Outlines Stance On Contingent Commissions

NU Online News Service, Oct. 20, 3:52 p.m. EDT

Although contingent commissions could represent a conflict in the relationship between producers and consumers, it is a conflict that can be managed and should not necessarily result in the prohibition of the practice, former New York Insurance Superintendent Eric Dinallo said.

Broker compensation that has received attention since a series of settlements in 2005, in which major brokers agreed to forego contingent commissions after investigations in New York turned up evidence that commercial insurance brokers were not disclosing compensation arrangements and steering clients to insurers involved in a bid rigging scheme.

Seeking to clarify his position on broker compensation, Mr. Dinallo told NU Online that contingent commissions are "not unlike a lot of conflicts in financial services that we often either manage or disclose."

He stressed that the conflicts surrounding contingent commissions are "not irreconcilable," and that these conflicts must simply be managed.

The current situation, where some brokers are prohibited from taking contingent commissions, others are voluntarily not taking them, and many others are taking them, has led to segmented markets that are not beneficial to anyone, Mr. Dinallo said.

As far as disclosure to clients, Mr. Dinallo said he could see where there might be differences in requirements depending on whether the producer in question is a captive agent, an independent agent, or an independent broker.

For captive agents, Mr. Dinallo said, there could arguably be little or no disclosure regarding where compensation is coming from, as it is understood that captive agents work for one company.

For independent agents, Mr. Dinallo said the disclosure should probably be more robust than for captive agents.

Independent agents, he noted, generally have several underwriters with whom they have trusted relationships. They should make clear to consumers that they are still compensated by those underwriters, Mr. Dinallo said, and they should be willing to disclose their relationships with the carriers.

Independent brokers, Mr. Dinallo said, are "arguably employed by the client, so their disclosures have to be really robust and they have to manage conflicts carefully."

He said it currently appears that there is not a tremendous client demand around banning contingent commissions, and that there is not political or regulatory consensus to ban them either. "But we deal with that through disclosure and management of conflict," he said.

Regarding public reaction, he noted that investigations into broker compensation practices initiated earlier in the decade by former New York Attorney General Eliot Spitzer revealed victims that were institutional clients, rather than Main Street clients, and so there was not a wave of consensus among the public that it had been taken advantage of. With institutional clients, Mr. Dinallo said, many people feel the marketplace should determine the outcome.

He said it will be interesting to see if risk managers for these institutional clients choose in the future to do business with brokers who do not accept contingent commissions.

Speaking to the lack of regulatory consensus, Mr. Dinallo noted that with investigations into Wall Street that preceded the bid-rigging investigations into the insurance industry, there was one regulator, the Securities and Exchange Commission, that could choose to ban a practice.

With contingent commissions, there are insurance regulators in each state, and some of them are accepting of contingent commissions while others are not. All of the state regulators, though, acknowledge that there is some conflict that needs to be looked at, Mr. Dinallo said.