Last January, the obituaries read: "Contingent commissions dead." Eliot Spitzer, the quick-draw New York Attorney General, cut another notch in his pistol grip.
Marsh, Aon, Willis and Gallagher--the top four insurance brokers--had all sworn to reject contingent commissions from carriers. Some industry observers said it was just a matter of time until the dust settled and the rest of the brokers did the same.
Maybe the obituaries were premature.
Most eyes were locked on Main Street, where property and casualty had the largest traffic in premiums. Some brokers received nearly half their P&C compensation from carriers in contingent "overrides," and bid-rigging and tying sales to reinsurance appeared. Under these circumstances, brokers indeed seemed caught in a classic conflict of interest between carriers and clients.
But High Noon may be waiting one street over, in employee benefits, where many brokers continue accepting overrides, and practice disclosure to eliminate conflicts.
Willis was the first broker to announce it would "abolish" overrides (Marsh "suspended" them a few days earlier). "Carriers shouldn't pay them. Brokers shouldn't accept them," said Willis CEO Joe Plumeri in his RIMS conference keynote speech in April. He concluded, "Let this be our defining moment, a moment when together, we put comfortable tradition behind us and rise above the controversy surrounding us."
Many brokers rejected the call, and the National Association of Professional Insurance Agents attacked Plumeri's speech. Even many top 10 brokers (ranked by 2004 total commissions) still accept overrides.
Rick Elliott, national employee benefits practice leader for Willis, has tried to recruit carriers to abolish overrides. "The general reaction I get is, 'Now the broker will be disclosing it, so that's no problem,'" he says. "And more broadly, if somebody jumps first, they're fearful that if they're one of four or five carriers a broker's reviewing to recommend to their client, and they're the only one that doesn't pay the broker a bonus, then they put themselves at a competitive disadvantage."
Joe Foley, senior vice president of market development for UnumProvident Corp., the largest disability carrier, seems to agree. "Eliminating contingent commissions would be fine with us," says Foley. "But ... it's hard to change in isolation. We would welcome clear direction on the regulatory side or from brokers or customers. The vast majority of producers are still saying that in their view, contingent commissions are fine, and they are expected as part of the business relationship." UnumProvident pays contingent commissions to brokers.
Competitive pressure from brokers like Willis may help move the market, Foley says. That influence might be appearing first in the recruiting wars for sales talent, rather than actual sales. Elliott estimates the Willis benefits practice has picked up 50 Marsh alumni in the last 12 months. At the same time, however, regional brokers who accept overrides have also lured away producers from Marsh, Aon and Willis.
Brokers who reject contingent commissions are taking heat during their transition to a new model, but carriers are affected, too. Most benefits carriers have little or no direct sales force, relying almost entirely on brokers and consultants to produce sales. "There's no clear consensus within the whole distribution channel," Foley says. "Some brokers want to do it one way and others want to do it another, and it's difficult for a carrier to have multiple approaches to distribution and compensation. We would rather have it all one way or the other."
According to Ben Haas, a principal with the Glen Allen, Va.-based broker Hilb Rogal Hobbs, "Most of the major carriers in employee benefits are continuing to pay overrides, and perhaps 80 percent of the carriers HRH works with do so."
Employee benefits markets have a different override equation than P&C markets.
Benefits overrides are smaller than those in P&C, usually about 10 percent of a broker's total commission on a sale, and therefore only about 1 percent of the premium, according to Foley of UnumProvident and Haas of HRH.
In employee benefits, brokers typically don't provide claim-intake services, an area where overrides could create a conflict of interest.
To Foley, these facts mean overrides have relatively little impact on employee benefits markets, suggesting the system doesn't need reform. To opponents of overrides, they mean reform could be accomplished with minimal pain.
Employee benefits overrides may be generally smaller than those in P&C, but not always. According to Spitzer's investigation of benefits broker Universal Life Resources, 45 percent of ULR's 2003 income was in overrides, and UnumProvident Life Insurance is one of the carriers alleged to have paid them, presumably at or near that level.
It isn't likely to occur again. San Diego-based ULR was released from litigation by California Insurance Commissioner John Garamendi in return for rejecting overrides and following stringent transparency and disclosure rules, while Garamendi's litigation continues against Cigna, MetLife, Prudential and UnumProvident. But the big gap between the standard 10 percent override and ULR's 45 percent raises the question of whether contingent commissions generate a conflict of interest in employee benefits broking.
Haas of HRH says clients are concerned primarily about "being fully informed and actively engaged in the process, as opposed to our simply soliciting bids and coming back with recommendations." To create more visibility for clients, HRH now uses the Web-based IE-Engine transaction-management system. "IE-Engine facilitates greater control of data, more detail about the plans submitting bids and how they're configured and priced, so clients get a better idea of the pros and cons of alternative vendors, which provides more control over the process," says Haas.
NEW BUSINESS MODEL
IE-Engine also sees itself as part of a new business model for brokers that reject overrides. "We've really become like an outsourcing solution," says Brent Bannerman, chief strategy officer for the Woburn, Mass., software firm. Brokers that have lost significant income by rejecting overrides must reduce staff to reduce cost. They can outsource the transactional services that were formerly rolled into the total cost of services, separating that piece and potentially making it self-supporting through billings.
"We're engaged in due diligence with more than six but less than a dozen brokers and consultants," Bannerman says. After the initial Spitzer shocks last October, "it took the firms three months or so to understand what they were going to do, they worked through the settlements, and now we're in the early stages of the solution phase. I think they're all dealing with the same three issues: transparency, delivering the same quality, with lower costs."
Even employers that want to abolish contingent commissions, like The Stride Rite Corp. and Regency Centers, are more focused on containing medical costs.
Both firms recently ended long-standing relationships with brokers, selected new brokers that reject overrides, and plan to install consumer-driven health plans as part of a long-term strategy to reduce benefits costs.
"Historically, we had paid a six-figure commission to our broker, receiving some very basic services. With our new broker, our fees have been reduced by 30 percent for broader and better consulting services," says Brian Fraser, vice president of people services for Regency Centers, a shopping-center developer with 350 employees based in Jacksonville, Fla. "We got a wake-up call that we could get better value for our brokerage dollar."
For Lexington, Mass.-based footwear maker Stride Rite, with more than 2,300 employees, broker costs will rise slightly. The payoff will be more services, such as employee education to help launch the CDHP, and claims data analysis to help Stride Rite manage risk and keep employee compensation competitive, says Janet M. DePiero, senior vice president of HR and administration. Speaking with her reference group of employers, DePiero found several others like Stride Rite, firms ready to issue a broker RFP and launch a comprehensive benefits review, with special needs to contain health-plan costs.
As with any contract, knowing the terms and participating actively helps extract more value from a broker. A major retailer and former ULR client commented about ULR's "communications fees," a category providing a surprising 22 percent of ULR's 2003 revenue. "If there's a fee in the contract, that money is there for me to use. We used it to do some nice communication and enrollment material and got very high 'take' rates," says the firm's benefits manager, who preferred to remain anonymous.
If Eliot Spitzer missed his High Noon with contingent commissions, it may be because the carrier-broker-client channel is too complex and evolving too rapidly for quick-draw solutions.
The same clients who want to eliminate contingent commissions also want more sophisticated broker services to help contain medical costs. The brokers who can bring those together may carve out a few notches of their own.
PETER MEAD, a writer living in Oregon, writes regularly about benefits issues.
August 1, 2005
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