Buyers fear implications of a US ruling that a broker can accept contingent commissions
A legal ruling in the American state of Illinois has raised serious concerns with risk managers on both sides of the Atlantic that controversial contingent commissions may resurface.
After a great deal of lobbying, the Illinois insurance regulator and Attorney-General resolved to allow US insurance broker Arthur J Gallagher (AJG) to accept “retail contingent commissions across all lines of its business”.
The decision has startled risk managers. Buyers had hoped that the spectre of contingent commissions had long been buried. In the past, these payments were made by insurers to brokers on the understanding that the broker would steer a certain amount of business their way. They are not actually unlawful, but following former New York Attorney-General Eliot Spitzer’s inquiry in 2004, most of the big brokers decided to voluntarily give them up.
This new development is a dangerous sign that these payments may start to creep back into the industry. There’s an obvious incentive for brokers to start receiving them again: they could add millions to their revenues. AJG estimated that, by accepting contingent commissions once more, it could add on $10m in revenue on an annualised basis by 2011.
Buyers are thoroughly against the commissions, however, saying it represents “an inherent conflict of interest”. How can a broker claim to be working on behalf of the client if they are receiving large sums of money on the basis that they steer that business in a certain direction?
The US Risk and Insurance Management Society (RIMS) was the first to give its verdict on the new ruling. It said that contingent commissions can be, and were in the past, “manipulated to the detriment of the insurance consumer”.
And it’s not just American insurance customers who are peeved. The Federation of European Risk Management Associations quickly stepped in and gave its view. It stood by RIMS and said it was “disappointed” with the decision.
The fear is that the ruling could have implications across the industry, in that insurance regulators elsewhere could consider allowing similar practices. Once one big broker decides to accept contingent commissions, the fear is that others will have to follow suit.
Buyers are right to worry. Spitzer was not able to close the book on contingent commissions altogether, and a great deal of smaller brokers continue to receive them. By falling short of an outright ban, many believe that Spitzer left the job unfinished.
The right thing for the industry would have been to ban all types of broker from receiving contingent commissions. But the door was left open for these types of payment to creep back in.
There are positive signs from the big brokers, however. At a recent New York hearing on the issue, Don Bailey, chief executive of Willis North America, said: “If we are truly serious about raising standards in our industry, a formal ban of contingent compensation agreements is the right thing to do.” And, last year, Aon decided that any broker that it bought would have to phase out contingent commissions within three years.
If there’s any hope of an end to the contingent commissions saga, the regulation must be uniform across the industry. But regulators have failed to take a tough stance on the issue. The FSA, for example, recently fell short of even demanding mandatory commission disclosure, which suggests it is a long way off from banning contingent commissions.
Clearly, the biggest worry is that the Illinois ruling opens the door for brokers to amend their contingent commission arrangements. The industry has made some positive moves since 2005 – many of which driven by the big brokers – and this gives hope that, with the right tone at the top, these developments can continue. Full broker transparency in all aspects of remuneration is an essential prerequisite for a healthy and competitive insurance marketplace.
- After heavy lobbying, Illinois regulators said Arthur J Gallagher could accept contingent commissions
- The ruling could have implications elsewhere as other brokers demand similar arrangements
- A return to the bad old days is not a good idea. Contingent commissions represent an inherent conflict of interest
- Full broker transparency in all aspects of remuneration is an essential prerequisite for a healthy and competitive insurance marketplace