RIMS Hails Marsh For Declining Contingent Commissions On Core Accounts

The Risk and Insurance Management Society hailed the recent declaration by Marsh that it will not accept controversial contingent commissions in its U.S. core insurance broking segment, while the battle over producer compensation disclosure continued to rage in New York.

“RIMS is pleased that Marsh has joined other large brokers in agreeing not to accept contingent commissions. We call on all brokers to make the same commitment to their customers,” said RIMS President Terry Fleming.

“Further, we call on the insurance industry to develop alternative forms of compensation that do not place the broker in the position of a conflict of interest in the insurance purchase transaction,” added Mr. Fleming, who is also director of the division of risk management for Montgomery County, Md.

RIMS, which maintains that contingent commissions should be universally banned, said it views Marsh's intentions as a positive step forward with regard to its U.S. clients served by its core broking operations.

RIMS believes contingent commissions impose an inherent conflict of interest upon the insurance buying transaction, regardless of the nature of the client or the intermediary.

Contingent commissions also impact pricing, according to RIMS, as the bonsus fees are passed along to the consumer. RIMS noted that it urges Marsh to adopt a global ban on such commissions.

RIMS also said it recognizes that many of its members regard enhanced commissions and contingent commissions as one and the same.

To that end, RIMS said it acknowledges Marsh's efforts to collect enhanced commissions on a flat fee, rather than a volume basis, and encourages Marsh, its carrier partners and its clients to continue having open and frank discourse over the nature of such compensation, how it is collected and disclosed.

RIMS said it will continue to work closely with all parties on the issues of producer compensation and disclosure.

Marsh said it would refuse contingent commissions on any placements for any U.S. core broking operation clients and will continue to provide detailed disclosure information on transactions. This includes all quotes received and compensation information.

However, Marsh & McLennan Agency LLC and Marsh Consumer's affinity sponsored program and personal lines businesses will accept contingent commissions. For these segments, the firm said it will provide plain language disclosure that meets or exceeds the New York Insurance Department's disclosure Regulation No. 194, as well as all other applicable legal and regulatory requirements.

The New York Department's rule, effective next year, followed a 2004 investigation revealing that large brokers had been taking hidden fees to steer commercial clients to a group of insurers involved in a bid-rigging scheme.

Marsh was among the brokers involved, and as part of the 2005 settlement agreements, said they would not accept contingent commissions.

In February, it was announced that Marsh–as well as Aon Corp. and Willis Group Holdings plc–had reached an agreement with New York, Illinois and Connecticut officials that would permit them to resume taking the commissions, providing they would abide by New York's new disclosure regulations. Willis, which abolished contingent commissions in 2004, said it would not resume taking them.

The New York disclosure rule, which Marsh agreed to adhere to, requires agents and brokers to describe their role in insurance transactions and how they are paid. More detailed information will have to be provided at the client's request.

AGENT CHALLENGE

The Independent Insurance Agents and Brokers of New York has said it will sue to block the new regulation, arguing that it is too burdensome and questioning whether the department has the authority to promulgate the rule.

The group first threatened to challenge the regulation in December 2009, and reiterated its intention to bring an Article 78 action in February when the department officially released its new rules.

However, the Professional Insurance Agents of New York said it will not join such a lawsuit.

PIANY President Kevin M. Ryan, in a letter to the association's agent members, said PIANY and other trade groups were invited to participate in the IIABNY lawsuit.

“Certainly, since this option appears quite popular among some of our members, it would have been 'safe' for us to simply join the suit,” he wrote. However, he added that the association will not join, choosing instead to represent agent/broker interests in further discussions with the department.

Mr. Ryan said the department has “made it absolutely clear that any group or individuals who participate in an Article 78 in regard to this regulation will not be engaged in any discussions regarding the development of compliance guidelines and the Circular Letter details, which will be critical if the legal action fails.”

He added that he sees the value in IIABNY filing the suit, and that he views the divergent paths of the two agent groups as essentially a two-pronged approach with the same goal–one group pursuing action through the courts and the other pursuing changes through discussions with the department.

“It is in the best interest of our member agents and brokers to retain our seat at that table lest nobody represent producer interests in what may well be an extremely important conclusion to years of work,” said Mr. Ryan.

Stating that PIANY joining the suit would not improve its chances of success, Mr. Ryan said the court “will rule on the soundness of the argument, not the number of groups making the argument.”

He further stated that PIANY consulted four attorneys who have experience with Article 78 actions, and with the Insurance Department, and Mr. Ryan said that “none of those with whom we consulted were overly optimistic that the suit will prevail.”

IIABNY President and Chief Executive Officer Dick Poppa said IIABNY still plans to move forward with the lawsuit and dismissed the notion that the action may not succeed.

“When our board made its decision to move forward, it was certainly aware of the odds of prevailing,” he said. “But with that, our board felt like it was the right thing to do.”

He also said he does not believe that the lawsuit will preclude IIABNY from continuing discussions with the department. “We don't accept the premise that we won't be at the table,” he said.

For its part, the department said it would be “very difficult” to have open discussions about the regulation with an entity that is party to a lawsuit against it.

“It is unfortunate that some have chosen to take this route,” said a department representative, Andy Mais.

(Additional reporting by Phil Gusman and Daniel Hays.)