Willis Campaign Against Contingents Fires Up Broker Compensation Debate

A public awareness campaign to educate risk managers about the evils of contingent commissions launched by Willis here last week sparked heated debate about the practice among the biggest brokers and insurers, with one of the firm's competitors calling the dispute nothing more than a “red herring.”

Joe Plumeri, chair and chief executive officer of Willis Group Holdings, urged buyers to “use their wallets to send a strong signal against the controversial payments.”

He unveiled a new interactive Web site (www.ClientsBeforeContingents.com) as the centerpiece of the Willis initiative to discourage the use of contingents, during a press conference at his exhibit booth during the Risk and Insurance Management Society's annual conference.

“Willis put its stake in the ground in 2004 and declared contingents a conflict of interest and not in the buyer's interest,” said Mr. Plumeri. “We stopped taking them in our retail business and are a better company for it. Buyers of insurance should ask their brokers to follow suit.”

Mr. Plumeri said “it's time for a level playing field that's free of these controversial payments,” adding that “when contingents become 20 percent of your revenue and a much higher share of your profits, it affects behavior–and never to the client's benefit.”

However, Dan Glaser, chair and CEO of Marsh, said during a broker CEO panel discussion at the conference later that same day that the controversy over contingents is “a bit of a red herring.”

“I don't think taking contingents is a litmus test on whether a broker has a conflict of interest,” he said. “Lots of other revenue streams could present a conflict. The solution is full disclosure [of broker compensation.].”

Mr. Glaser added that “it is simplistic to say if you take contingents, you have a conflict, and if you don't, you're conflict-free. That's just not accurate.”

Marsh's main brokerage unit does not accept contingents on U.S. and Canadian accounts, but does accept them abroad and in its growing U.S. independent agency affiliate.

When asked at his press conference whether Willis had negotiated higher standard commission rates–agreed to upfront as a pure percentage of premium–to make up for the loss of contingents based on volume or profitability of business produced, Mr. Plumeri said “of course we have. Just because we won't accept contingents doesn't mean we don't expect to be paid for our services.”

However, when asked if differences in the standard commissions negotiated with carriers might not also create a potential conflict, Mr. Plumeri said “the difference in standard commissions among the carriers we do business with is minimal, and certainly not enough to influence the placement decision.” He said his commission rates are fully disclosed to buyers.

In response to another question, Mr. Plumeri said if buyers would rather pay Willis a negotiated fee directly for placement and other services, they have that option. “That's up to the clients,” he said.

During the broker panel, J. Patrick Gallagher Jr., chair, president and CEO at Arthur J. Gallagher & Company, said he agreed to give up contingent commissions “if regulators could change the industry model [on broker compensation], but if not, we said we'd have to revisit this. How can you justify dual regulation? It's not fair to have one set of rules for just about everyone, and another set for a select few.”

Mr. Gallagher agreed with Mr. Glaser that the “best solution is full disclosure.” He said he implemented that policy at his firm even though “it was not easy for us. A big part of our business is not risk manager accounts. But we are fully transparent down to the individual [business owners policy].”

He added that Gallagher “put in a compensation hotline, and we didn't get one complaint, and we have gotten no pushback on disclosed commissions. What does that tell you? Full disclosure results in an adult conversation about how brokers are compensated.”

Mr. Gallagher lamented that “this whole fiasco cost us a quarter-of-a-billion dollars–mostly on lawyers–and we did absolutely nothing wrong.”

John Lumelleau, president and CEO of Lockton Inc., said “the issue is not contingents; it's behavior. Full disclosure is the answer. It's never a bad idea for our clients to know what we earn. We don't hide it. And if there are any objections, we adapt.”

Top carriers, caught in the crossfire between their major brokers, also weighed in on the compensation issue during the RIMS conference.

“Attorneys general and regulators have spoken–contingents by any name present a potential conflict of interest that can be alleviated by full disclosure,” said Evan Greenberg, chair of ACE Ltd., during a panel discussion among insurance company leaders. “But contingents are still legal, so the marketplace will have to decide this.”

However, Mr. Greenberg added that “since brokers, unlike agents, work for the client, in a perfect world the client would pay their broker directly. But that's not the way the system usually works.”

He said that ultimately, “we have to look to the buyer. Either way, it's your money paying brokers. What form of broker compensation is your organization comfortable with?”

Edmund Kelly, chair, president and CEO at Liberty Mutual Group, agreed that however brokers are compensated, “it's going to end up in the cost of coverage. We'd all be better off if the client just paid for their broker's services, but since that's not how it goes most of the time, disclosure is at least a big step forward.”

Mr. Greenberg hastened to add that “we do not begrudge brokers their fair compensation. We're just discussing how that should be done.”

Among the features on the new Willis Web site for risk managers (www.ClientsBeforeContingents.com):

o A “toolkit” to teach buyers about the mechanics of contingent commissions and the questions they should be asking their brokers.

o A blog to encourage debate from all sides of the contingent controversy.

o A “testimonial” page where buyers can sound off about where they stand when it comes to contingencies.

o A “newsroom” with all the latest coverage about the subject.

o A “white paper” by the law firm of Edwards Angell Palmer & Dodge LLP outlining the history of contingent commissions and their inherent conflicts.

“Ignorance is the biggest obstacle we face in getting our message across on contingents,” said Mr. Plumeri. “It is our hope that by virtue of this campaign, risk managers will begin to better understand their relationship with their broker, and why it's not in their best interests for brokers to be incentivized by contingents.”