The debate over whether the major brokerages should be allowed to earn contingency fees for delivering a certain volume or quality of business to carriers raged anew this year after Illinois eased restrictions over the practice.
As of Oct. 1, with the blessing of Illinois Attorney General Lisa Madigan, Arthur J. Gallagher was once again allowed to accept contingent commissions after an almost four-year ban imposed by Ms. Madigan and New York's attorney general at the time, Eliot Spitzer, following a kickback scheme uncovered at Marsh & McLennan Companies.
In September, when the Itasca, Ill.-based broker's Chair, President and CEO Patrick J. Gallagher Jr. made the announcement about the ban being lifted, executives from Marsh (the brokerage subsidiary of MMC) and Chicago-based Aon applauded the decision, and rumors began to swirl they were in talks with New York's Attorney General's Office to lift the ban on contingents for them as well.
AJG's pardon, said Mr. Gallagher, came about after the realization that nationally, regulators were not going to ban contingents, putting the broker at a financial disadvantage. He also stressed the firm's strict adherence to transparency so clients understand how they are compensated and the influence that could have.
Groups representing corporate buyers (the Risk and Insurance Management Society), public entities (the Public Risk Management Association) as well as individual consumers (J. Robert Hunter, director of insurance for the Consumer Federation of America) stressed the need for transparency to avoid conflicts of interest.
But Mr. Hunter said transparency is no panacea. "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."
He concluded that acceptance of contingencies "has to be banned–it sets up an automatic conflict. There is a perverse incentive. You can't tell me every agent is perfect and clean."
When AJG's ban was lifted, RIMS noted that the announcement would probably lead to Marsh, Aon and Willis striking similar agreements once New York put compensation disclosure rules in place.
However, Willis Chair and CEO Joseph Plumeri–an early critic of the practice, even before the industry's bid-rigging scandal–remains firm in his opposition.
"We've already decided at Willis that we're not going back to the old ways," he said in a speech last month in Chicago. "We're looking to the future, and we will continue to put in place the measures that will enhance trust and transparency–not undermine them."
New York's former insurance superintendent, Eric Dinallo–who initiated the formulation of new producer compensation disclosure rules–said after leaving office earlier this year that a segmented market where some are banned from taking the commissions and others are not isn't good for anyone.
The contingents, he said, are "not unlike a lot of conflicts in financial services that we often either manage or disclose," stressing that the conflicts around such compensation arrangements are "not irreconcilable." He added that he saw no great clamoring among buyers to end contingency deals.
A draft regulation published this month by the New York Insurance Department, requiring agents to explain to clients their relationship with carriers, drew fire. Indeed, the Independent Insurance Agents and Brokers of New York threatened to sue.
The concern, according to IIABNY, is that the proposed regulation is too much of a burden on producers. IIABNY President and CEO Richard A. Poppa said he believes the rule is unnecessary but held out hope that concerns could be worked out.
Responding to IIABNY's threat, the department's Special Counsel, Matthew Gaul, said regulators were surprised that the least controversial element of the rule would prompt the threat of a lawsuit. He added that while for years the organization has branded its members as the "Trusted Choice" for consumers, it sounds like agents don't want to tell clients that "in most transactions they represent the insurance company."
Thus, the war of words continues, and perhaps will spill over into a court battle before long.
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