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By CYRIL TUOHY, managing editor of Risk & Insurance®

BOSTON---It's the issue that will not go away--and even seems to have deepened following regulatory approval earlier this year for commercial insurance brokers to receive extra payments from carriers.

"(It) is widely known that we want a prohibition of contingent fees," said RIMS President Terry Fleming. Absent that, he added, RIMS is in favor of "full transparency on a mandatory basis."

Contingent commissions are extra payments made by insurance carriers to brokers based on business volume. The extra commissions are paid in addition to the commissions collected by brokers from buyers.

"We're looking to find a better model," said Fleming, director of the Risk Management Division with Montgomery county, Md. "We're asking the market to do that and asking risk managers to walk the talk. I go with brokers who don't take payments or place with companies that pay this."

Fleming delivered his comments during a press conference by RIMS executives, a day after the CEOs of the nation's top insurance brokers said the best way to face the issue was not by banning the practice but by disclosing to buyers the payments coming from carriers--a strategy known as "full disclosure."

"Really, the way we address conflicts of interest is with full transparency and disclosure, systems and controls around the management of conflicts, and having an open dialogue with the client about the potential conflicts," Dan Glaser, chairman and CEO of Marsh Inc., was quoted as saying, in a panel discussion on the issue on April 26.

In February, the New York Insurance Department authorized the carrier payments after some brokers invoked a self-imposed ban on the practice in the wake of a bid-rigging scandal uncovered by former New York Attorney General Eliot Spitzer in 2004.

In the Marsh case, brokers were earning incentives to steer business to one carrier over another, and critics pointed out that brokers involved in the practice could not represent the interests of buyers any longer.

The large brokers--Aon, Marsh and Willis--subsequently settled out of court for hundreds of millions of dollars. Smaller brokers continued to accept the payments from carriers.

Following the scandal, Marsh banned the practice, but earlier this year said the ban applied only to its largest accounts. Willis has eschewed the practice entirely, and CEO Joseph Plumeri reiterated that stance in a press conference April 26. Arthur J. Gallagher & Co. condones the practice.

The other large broker, Aon, hasn't disclosed whether it would resume the practice of accepting contingent commissions.

Since 2004 brokers, who rely on commission income for survival, claimed that the playing field has been unfair as regional and local brokers continue to accept the commissions.

RIMS executives agreed on the importance of educating risk managers on the nuances of broker compensation.

The more insurance buyers know how to negotiate with brokers, and where and how brokers are making money, the better off buyers will be, said RIMS Secretary Scott Clark, risk and benefit officer for the School Board of Miami-Dade county, Fla.

"Some buyers are not aware of the contingency fee so education is important," Fleming said. The Chartered Property Casualty Underwriters Society, offers courses in the field, added Clark.

As reported by Risk & Insurance® earlier from RIMS, an ongoing survey of risk managers by Towers Watson has found that many risk managers are not as opposed to contingent commissions as perhaps RIMS leadership would like.

April 28, 2010

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