By WILLIAM ATKINSON, who has been writing in all areas of business, including risk management and insurance, since 1976
On February 17, the New York Insurance Department (NYID) and the Attorney General of New York came to a decision to allow the nation's top insurance brokerage firms to resume accepting contingent commissions. But this move has done little to heal the rift caused by the revelation of these practices and end the finger-pointing.
"What triggered all of the issues in 2005 was when Eliot Spitzer, who was the attorney general in New York at the time, found a small number of instances of actual bid-rigging in the insurance industry," said Wes Bissett, senior counsel for the Independent Insurance Agents and Brokers in Alexandria, Va., the so-called Big I. "This was outright illegal activity. Marsh was the big player at the time."
Marsh ultimately entered into a broad settlement agreement, including not being able to accept any form of contingent commissions going forward. After that, Aon and Willis entered into similar agreements--albeit smaller in restitution at $190 million and $50 million, respectively, versus Marsh's $850 million. This was done to settle allegations and concerns that they had steered business to insurers that paid the highest contingent commissions.
But should risk managers have known about these practices before Spitzer's crusade? Can they share some of the blame?
According to Bissett, it would have been very difficult for risk managers to know that there were phony bids coming in.
"Perhaps they could have shopped policies with smaller brokers, who would have worked with different companies to find the best policies," he said.
Robert Schneider, managing principal, risk management practice, for Jersey City, N.J.-based ISO, however, sees more a more nuanced picture in which only a small number of brokers were involved in the perceived misuse of commissions.
"By and large, though, contingent commissions were just a fact of the marketplace, and were not being misused in most cases," he said.
One reason he believes that the misuse was limited was that contingent commissions didn't necessarily win business for brokers.
"The idea of putting a quote up from a market that gave you a contingent commission simply for that reason created a tremendous risk of potentially being uncompetitive," he said.
THE NEW DEAL
According to the recent NYID ruling, the decision to lift the ban came after a thorough review of the companies' compliance with the current settlement agreements and a desire to help consumers by "providing a level playing field for insurance intermediaries on which they can easily be compared."
What has reaction been to the ruling? On one hand, brokers appear to support it but are wary of government intervention, while risk managers seem to want the former, stronger intervention.
Nicole Allen, interim vice president, marketing and communications, for The Council of Insurance Agents & Brokers, lauded the transparency requirement, something CIAB has long supported.
"Having said that, though, we have always thought that it is not the place of government to prescribe how a broker is paid. That should be between the broker and their client," said Allen, adding that the NYID regulation is consistent with that principle.
Bissett of the Big I, whose members largely continued accepting contingent commissions after the big brokers stopped, feels strongly about the role of this form of renumeration.
"We believe that the elimination of contingent commissions as a form of incentive compensation would be a huge mistake," added Bissett. "If this were a priority for RIMS, that would be an area of disagreement for us."
And the Risk &
Insurance Management Society (RIMS) does disagree. In the risk managers' corner, RIMS has voiced its dismay with the New York decision.
"RIMS has always taken a clear stance that we don't support contingent commissions," said Scott Clark, director of the RIMS External Affairs Committee and risk and benefits officer for the Miami-Dade County (Fla.) Public Schools. "While there may be some valid business reasons, we believe that it provides just enough obscurity in the insurance transaction that it is difficult for the risk manager to find out where the money is going, and it is not very transparent."
According to Clark, when "the wheels came off" on this issue in 2005, RIMS was glad that the major brokers were prohibited from taking contingent commissions. "We felt this would help insurance buyers find their ways through the transaction process without obscurity," he said. "As a result, we are disappointed that this is no longer the case."
There is a third view too: Are contingent commissions even worth all this hoopla?
"There has always been some thought coming from the risk management side that contingent commissions were increasing the cost of the program," said Schneider. "However, in reality, it may not be the actual cost of the contingent commission itself that is the problem. It may be the regulations that govern its use."
RISK MANAGERS' EDUCATION
Though Clark would not comment on whether risk managers should have had a better understanding of what was going on with their brokers prior to Spitzer, he did discuss plans to provide resources to its members in this regard going forward.
"When risk managers get involved in insurance transactions, they really need to be very educated consumers, so they can ask the right questions," he said.
In the Fall of 2009, RIMS published "A Practical Guide to Insurance Broker Compensation and Potential Conflicts of Interest for the Risk Manager" (free to members, $150 for non-members), which could help them ask the right questions during transactions, said Clark.
And, at its annual conference in Boston this April, RIMS has a special "Hot Topic" session devoted to broker compensation.
March 2, 2010
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