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By ERIN GAZICA, a freelance writer from Pottstown, Pa.

Contingent commissions are no longer off limits to the largest insurance brokerage firms because state officials in New York lifted the ban back in February. But insurance industry analysts say there's good reason why Marsh, Aon and Willis haven't been chomping at the bit to go back to the pre-Spitzer days.

"There isn't a rush or a sense of urgency with regard to these payments," said Keith Walsh, insurance broker analyst with Citi Investment Research in New York. "These companies are in very different places than they were four or five years ago. They are all, in my view, much better run, and they don't need the subsidy to earn a good margin."

Of course, any public company would be interested in enhancing the amount of money they make, and the big three brokers have responded to the regulatory change in their own ways in the months since the announcement was made.

Joe Plumeri, Willis chairman and CEO, reiterated his consistent stance against contingent commissions, stating at a meeting of insurance executives in London in February, "I am convinced that the only way to resolve the conflicts inherent in contingent commissions is to not take them. At Willis, we've abolished them, and we're not going back."

In late March, Marsh made a public statement that the firm will not accept contingent commissions on its core U.S. brokerage segment, but will accept them in its Marsh & McLennan Agency and Marsh Consumer's affinity, sponsored program and personal lines businesses. In addition, Marsh said it will continue to collect "enhanced commissions and fees for services from insurers with respect to its core brokering operations."

Aon, as of press time, has not made an official public statement on contingent commissions, but since Marsh's announcement, Aon has said in media reports the firm has "no current plans" to collect them.

Why has there been no feeding frenzy?

Analysts agree that brokers will continue to make money regardless of whether they accept contingent commissions, as they are allowed to do by law.

For example, when the ban was still in place, one of the amendments to the agreement with the New York attorney general allowed brokers to accept other streams of income from carriers as long as they provided a service. Walsh said Marsh began creating "placement hubs" by region so that underwriters could aggregate premiums by region instead of by city. In exchange for this service, Marsh charged a placement fee--which it referred to in its March statement--not a contingent commission.

What about Willis? When it comes to contingent commissions, "they are kind of stuck," said Meyer Shields, principal with Stifel, Nicolaus and Co. Inc. in Baltimore. Plumeri took such a strong stance as the first broker to denounce them, even before a regulatory agreement was made; he dug himself into a bit of a hole now that the ban against contingent commissions has been lifted. Then again, Willis wasn't as dependent on contingent commissions to begin with as was Marsh or Aon.

"I think his hope was that that would create an attractive model for clients and that they would be able to win business using that position," Shields said. "My sense is that it hasn't been incredibly successful because, if it was, I think we would have seen a number of other brokers adopt the same stance."

However, Walsh said, Plumeri's stance has a lot of validity because it simplifies the business. Plumeri can't go back now, and it's possible that, when he first started speaking out against contingents a few years ago, he didn't believe they would be reinstated.

"But at the end of the day, Joe's going to get paid," Walsh said. "It's all semantics in this business, about how you get that money." For example, if Marsh is going to get placement fees on some of its business, Willis might push for higher rates as a percent of premium on its regular, straight commissions, Walsh said. "It's not like he's going to sit back and watch his two competitors get paid more."

As for Aon, analysts agree the brokerage firm is taking a wait-and-see approach, watching how the decisions at Willis and Marsh unfold.

"We strongly believe that it is in the best interests of clients that state regulators use their authority to require clear and consistent disclosure of the compensation of brokers and agents, and Aon will continue to take the lead on this important issue," CEO and President Gregory C. Case said, in a press release on the Aon website.

Walsh said he envisions Aon taking Marsh's lead by exploring contingent commissions in areas of its business where it makes sense, but by steering clear from broaching the subject with its core Fortune 500 segment.

"The risk managers in that segment are very, very aware of this issue and are very anti-commission for the most part," Walsh said.

Indeed, the Risk and Insurance Management Society Inc. expressed its "dismay" in its initial public statement about the lifting of the ban on contingent commissions. But the risk management community seems to be reacting favorably so far to how the various brokerage firms have responded to the regulatory change. RIMS issued a press release applauding Marsh's stance against collecting contingent commissions for its core segment--those large accounts that RIMS represents.

"I think it's a very well-thought-out strategy," Walsh said. "I think Marsh saw that it made more sense to not fight their customers in that part of the market but to focus more on their placement hubs with the underwriters. And then they can explore the contingent commission model with their smaller agency business, their international business and personal stuff for high-net-worth individuals, where it's more acceptable."

As the top three brokerage firms begin to make changes to their streams of income--whether contingent commissions or otherwise--analysts agree the numbers won't be affected significantly in the next year or two. Walsh said that margins won't ramp up in one year, but instead brokers will see a steady increase of as much as 20 percent in the next few years.

"This is not a transformational change," said Walsh. "It's not money that they are going to break out to you in financial statements. It's just going to bleed into the income statement over time. It's not a reason to buy these stocks just on this alone."

Shields said there won't be an impact in 2010 because it takes time to negotiate these issues with clients and underwriters. Brokers will have conversations account by account, and they typically won't happen until renewal dates approach. New sources of revenue will start to trickle in by next year with the larger impact occurring in 2012, he said.

"I think contingent commissions used to be a crutch for Marsh and Aon and a bit for Willis pre-Spitzer," Walsh said. "But now all three of these companies are making good margins as healthy public companies without these contingent commissions."

June 1, 2010

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