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Beginning in April, Willis Group Holdings announced it would begin taking contingent commissions on its North American Employee Benefits business as a way to remain competitive and reward shareholders.

The move, first announced in February, left some industry observers puzzled given CEO Joseph Plumeri's drumbeat against accepting commissions in the property/casualty segment. Even Willis seemed to be at odds with its own policy of accepting contingent commissions for the placement of benefits.

The move was necessary, Willis said, because many insurance carriers in the benefits space have stopped paying brokers uniform commissions and instead paid them based on volume as health reform has altered the health and benefits landscape.

Contingent commissions are paid by insurance companies to reward brokers for steering business to insurance carriers. Critics say the practice creates a conflict of interest for the broker as insurers exert pressure to place business with carriers offering higher commissions when brokers are supposed to be representing the interests of buyers.

Willis had signaled it would change its compensation structure for benefits as early as last July when it notified clients that it was reviewing its compensation policies in response to the changes imposed by carriers.

Changing the compensation structure is likely to help Willis boost profits as well. The company reported 2011 fourth-quarter net income of $44 million, down $59 million from the previous year. Fourth-quarter revenues were $825 million, down 1 percent from the year-ago period, the company also reported.

With the acceptance of contingent commissions within its benefits business, Willis finds itself playing both sides of the contingent commission fence. Its retail brokerage property/casualty business has continued to eschew contingent commissions.

"Carriers shouldn't pay them. Brokers shouldn't accept them," said Plumeri, in his 2005 keynote address to the Risk and Insurance Management Society Inc.

Brokers often did not disclose their contingent income to buyers who were left in the dark about their broker's finance incentives for placing a risk with one carrier over another.

In 2010, regulators in New York, Illinois and Connecticut lifted a five-year-old ban on contingent commissions for Chicago-based Aon Corp., New York-based Marsh & McLennan and London-headquartered Willis Group.

Itasca, Ill.-based Arthur J. Gallagher & Co., the world's No. 4 broker, reached a separate deal on contingent commissions with Illinois regulators in 2009.

The big nationwide, global brokers complained that they were not competing on an even playing field as many of the nation's smaller regional and local brokers continued the practice of collecting volume-based commissions from carriers.

The different rules made it more difficult for buyers to accurately compare prices, and were in fact "distorting" the market, the big brokers argued.

In exchange for lifting the ban, the brokers promised to disclose sources of contingent commission income to buyers, and it was after the 2010 deal that Plumeri announced Willis would refuse contingent commission income for placing property/casualty risks.

Also in 2010, Marsh's core U.S. brokerage operations announced it would not accept contingent commissions from insurance companies for any coverage it arranges for U.S. clients. Aon has continued to accept them "where legally permissible."

In 2004 New York Attorney General Eliot Spitzer sued the nation's largest insurance brokers on the grounds of big rigging and collusion, and the brokers settled for tens of millions of dollars.

-- By Cyril Tuohy

May 1, 2012

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