Let The Buyer Beware On Broker Compensation

I have read with interest as National Underwriter has published numerous articles related to the back and forth between groups which, on the one hand, disavow contingent fee arrangements and, on the other, defend the practice of brokers and agents accepting this form of compensation.

As 2010 president of the Risk and Insurance Management Society, I feel obligated to weigh in with the perspective of risk managers who buy commercial insurance from these brokers and agents on behalf of their employers–whether they be industrial, service, nonprofit, charitable or government entities, large or small.

For years, RIMS has staked out the position that contingent commissions represent an inherent conflict of interest for the broker whose duty of loyalty is to the consumer. Recognizing that contingent commissions are legal, we have vigorously fought for full transparency and disclosure at a meaningful time in the insurance purchase transaction, as the New York Insurance Department has put forth regulations trying to balance the interests of commerce with their mission of protecting consumers.

In New York, RIMS filed numerous comment letters and attended formal and informal meetings consistently urging the department to require full and upfront disclosure of all forms of compensation that insurance producers will accept.

The rationale for our position is that complete transparency, in the absence of a ban on contingents, permits insurance buyers to make educated and informed decisions and to discern whether they are getting the best possible policy terms at the best price.

Meanwhile, the Independent Insurance Agents and Brokers of New York has advocated in favor of contingency fees, while at the same time espousing transparency. These two concepts, however, are contradictory, as compensation received on the back end of a transaction can only be disclosed as an estimate on the front end.

The New York regulation does require that a reasonable estimate be provided based on prior transactions, but this issue only further shows the murkiness that contingents lead us into.

Furthermore, IIABNY has challenged the New York Insurance Department producer compensation regulation under the theory that the department lacks the statutory authority and, failing that argument, that disclosure of compensation upon consumer request is so overly burdensome as to violate both the New York and U.S. Constitution's due process guarantees.

These groups, however, have consistently maintained the need for transparency only upon and after a consumer has made the request for disclosure of compensation–yet this is essentially what the New York regulation calls for.

Under the regulation, producers are only required to provide detailed disclosure upon consumer request. In my opinion, the stated policies of those against the regulation do not foster a relationship of trust that should be implicit between a buyer and broker in the insurance purchase transaction.

Most recently, in the Aug. 9 edition of National Underwriter, the president and chief executive officer of the Independent Insurance Agents and Brokers of America, Bob Rusbuldt, stated his belief that if agents and brokers stopped taking contingent commissions it would, in reality, be bad for insurance purchasers because it would force his members to focus on volume, which would be bad from a “risk management” perspective.

The IIABA president then went on to challenge Willis, which has disavowed contingent fees, to fully disclose all of its standard commissions so that consumers can choose between potentially higher upfront fees or other forms of compensation, such as back-end contingents.

While I applaud the challenge to Willis, why stop there? Many RIMS members already insist upon complete disclosure up front, at which time they are able to discern exactly what they are paying their broker. I, for one, insist my broker take this position as I believe my due diligence as a risk manager and duty to my employer requires it.

Last year, RIMS published “A Practical Guide to Insurance Broker Compensation and Potential Conflicts of Interest for the Risk Manager” to best serve our membership's interests. We are taking the next step and making additional information available that provides guidance as to how our members can expressly prohibit their broker from accepting a contingency fee on their business and make explicit any upfront fees so they can determine which broker they will select to place their business.

In this way, the consumer will know at the outset what fees they will be paying for their lines of insurance coverage.

While we recognize that contingent fees are legal, perhaps the IIABA will take up the challenge it posed to Willis and get squarely behind full transparency and disclosure voluntarily. In that way, perhaps we can settle the issue once and for all.

Terry Fleming is president of the Risk and Insurance Management Society, as well as director of the Division of Risk Management, in Montgomery County, Md.