Don't Penalize Agents For Mega-Brokers' Sins

In Hollywood, a movie sequel is seldom as compelling as the original. The same is true about the manufactured controversy regarding contingent commissions in insurance. The sequel to the 2004 brouhaha regarding contingents is now playing.

Although the original lead actor–New York's former attorney general and governor, Eliot Spitzer–was not available for the sequel due to a poor performance in an unrelated X-rated venture, many of the same players from 2004 are involved. The script has been updated, but the tired story line is the same.

When last we left the issue of contingent commissions received by certain mega-brokers, several had signed what were described as "voluntary" agreements to settle ongoing investigations by state attorneys general involving allegations of bid-rigging and account-steering.

By entering into these agreements, the firms did not admit to any wrongdoing, but did agree to stop accepting contingents. However, almost immediately, several argued successfully that they should be allowed to accept contingent commissions when acting as managing general agencies.

Commission disclosure was part of the settlements because mega-brokers were allegedly taking fees from insureds while collecting undisclosed money from carriers for essentially the same service.

In contrast, how Main Street independent agents get paid is very transparent. In the vast majority of transactions, the customer is fully aware they don't pay us (the insurance company does), and we've never objected to the customer having a clear understanding of that relationship.

Consumer protection is the paramount issue, and that is achieved by existing regulations that (1) make sure the buyer knows the cost of the product through clear disclosure of premium; and (2) require commission disclosure when we ask the client to pay us a fee to avoid the perception we are working only for them as opposed to the buyer and the carrier as well.

Over the ensuing years, the mega-brokers were successful in their continuing efforts to have authorities peel away in layers the restrictions their legal settlements had imposed on their ability to receive contingency compensation in many areas.

Meanwhile, they argued that the practice and compensation restrictions brought about by investigations of alleged mega-broker malfeasance should also be applied to Main Street agents, who were not involved in any wrongdoing.

So let's be clear: Main Street retail independent insurance agencies–which are, not so coincidentally, their major competitors in the retail market segment–were punished for something they didn't do.

But Main Street agencies were successful in court, as well. PIA National in 2006 was the first to file a "friend of the court" brief with the U.S. District Court for the District of New Jersey, in opposition to certain aspects of one of the proposed settlements.

Our main point of contention: the settlement agreements attempted to create a remedy for alleged wrongdoing and then impose it on those who were not involved in any wrongdoing. The agreements should not be extrapolated to others, especially Main Street agents, just because we operate in the same retail insurance market space.

Beginning in 2007 and through 2009, the courts declared there is nothing illegal about contingent commissions, as long as there is transparency. Three of the mega-brokers moved forward to petition their state attorneys general and insurance regulators to modify their settlements accordingly.

By early 2010, an agreement was reached with officials in New York, Illinois and Connecticut that opens the door to allowing the nation's three biggest mega-brokers to once again accept contingent commissions. As part of that agreement, the three have agreed to abide by new disclosure regulations currently being drafted by the New York Insurance Department that have become the subject of controversy among independent agents in New York, and use those same regulations in all states, Washington, D.C., and all U.S. territories.

The Independent Insurance Agents and Brokers of New York and the Council of Insurance Brokers of Greater New York jointly filed a lawsuit to prevent the New York Insurance Department from implementing a proposed producer compensation disclosure law.

PIA of New York has made a strategic decision not to join in the suit, but rather to continue ongoing discussions with the department to make the new disclosure regulation less onerous for independent agents, if it is ultimately adopted.

So the courts have weighed in and declared contingent commissions to be legal, and New York is developing a regulation focused on disclosure that does not ban contingent commissions. End of story, right?

Not exactly. Against this backdrop, some have argued that accepting contingent compensation constitutes an inherent conflict of interest. We disagree. Among the mega-brokers, some also disagree.

As reported by National Underwriter on April 27, 2010, the chief executive officers of several major brokerages roundly disputed criticism that contingent commissions are an inherent conflict because total disclosure eliminates the issue.

John L. Lumelleau, president and CEO of Lockton, said: "The issue is not contingents; it is behavior." Daniel S. Glaser, chair and CEO of Marsh, called the debate over contingency "a bit of a red herring" and "not a litmus test of conflict of interest." Greg Case, president and CEO of Aon, observed: "Ultimately what is important is the value for the price that clients receive."

PIA members find it offensive when anyone casts aspersions on our professional integrity simply because we may receive a year-end bonus–one that is legal, ethical and transparent. Main Street retail agencies have an ethical responsibility, a legal requirement and a business interest to serve their customers. They do not possess the size and market dominance required to engage in the kind of suspected market manipulation that was at the root of the 2004 controversies that set this all off.

Our carriers' producer compensation systems were and are legal, ethical, effective and supportive of good competitive pricing dynamics. The free enterprise system, which includes insurance carriers, must have the freedom to structure their compensation systems as they see fit and not have their competitors dictate to them what is acceptable.

Contingents permit carriers to reward the most professional agents who give them accurate underwriting information and business that fits their market niche. This results in a more efficient market with lower premiums for consumers.

Efforts to ban contingent commissions, yearly bonuses or any form of incentive compensation must be seen for what they are: anti-competitive attacks on how our American free enterprise system operates.

One or more mega-brokers at the top of the insurance marketplace should not be able to dictate to, and therefore exert top-down control of, the entire industry as to what is acceptable compensation. And when attempting to do so, these mega-brokers should not be permitted to perversely argue that extending the kind of sanctions placed on them to their retail Main Street competitors would "level the playing field."

PIA has consistently advocated that insurance customers should be fully aware of how we get paid. And rules governing disclosures of producer compensation should not interfere with, misdirect or stifle competition, leaving insurance consumers with fewer choices, and lessened value.

Accurate, timely and useful disclosure rules for consumers' benefit should be the ultimate goal. Such viable rules would avoid less useful, unduly unreasonable or burdensome disclosure directives.

The members of PIA reaffirm our position in defense of common sense compensation that is legal, ethical and transparent. It has served our industry and businesses throughout our economy well.

PIA will continue to fight for the right of carriers to reward their independent agent producers with such common sense compensation. The idea that this creates an inherent conflict of interest is just plain wrong. It is simply a sequel to a bad movie that has already flopped at the box office.

Kenneth R. Auerbach, Esq. is the immediate past president of the National Association of Professional Insurance Agents, headquartered in Alexandria, Va. He is a managing director and general counsel of E&K Agency in Eatontown, N.J.