Although contingent commissions could represent a conflict in the relationship between producers and consumers, that can be managed and should not necessarily result in the prohibition of the practice, according to New York's former insurance superintendent, Eric Dinallo.
Seeking to clarify his position following reporting on a recent speech, Mr. Dinallo told National Underwriter 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 such compensation deals are "not irreconcilable."
The current situation, where some brokers are prohibited from taking contingent commissions, others are voluntarily not taking them and many others do accept them, has led to segmented markets that are not beneficial to anyone, according to Mr. Dinallo.
As for disclosure to clients, Mr. Dinallo said he could see where there might be differences in requirements depending on whether the producer is a captive, 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 such agents work for one company.
For independent agents, Mr. Dinallo said disclosure should probably be more robust than for captive agents, since such agents generally represent several underwriters. They should make clear to consumers they are still compensated by insurers, Mr. Dinallo said, and should be willing to disclose their relationships with each carrier.
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 appears there is not a tremendous client demand around banning contingent commissions, and there is no political or regulatory consensus to ban them, either, "but we deal with that through disclosure and management of conflict."
Regarding public reaction, he noted that investigations into broker compensation practices initiated earlier in the decade by the state's former attorney general, Eliot Spitzer, revealed victims that were institutional clients, rather than Main Street customers, 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 feel the market should determine the outcome. He said it will be interesting to see if risk managers for these institutional buyers choose to do business with brokers who do not accept contingent commissions.
Speaking to the lack of regulatory consensus, Mr. Dinallo noted that with probes into Wall Street that preceded the bid-rigging investigations in 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 accept contingent commissions while others do not. All state regulators, though, acknowledge there is some conflict that needs to be looked at, Mr. Dinallo said.
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