Risk Managers Take Strong Stand Against Contingent Commissions

The largest association of commercial insurance buyers has stepped-up its opposition to the acceptance of contingent compensation by any agent or broker, calling such compensation “an inherent conflict of interest” in a strongly worded policy restatement.

The 10,000-member Risk and Insurance Management Society (RIMS) said it is “troubled” that some in the insurance industry continue to promote contingent compensation even after “recent investigations, admissions and fines demonstrate how these practices can be manipulated to the disadvantage of the insurance buyer.”

“RIMS supports a business model for the insurance industry which does not provide for, offer or make available contingent commission arrangements for the brokerage industry,” the group said in its revised policy statement.

For any broker or independent agent to accept these fees “represents an inherent conflict of interest,” according to RIMS, which called for an end to contingencies.

RIMS had issued a policy position in 2005 that criticized contingencies but which did not call upon the insurance industry to discontinue them as the current policy does.

According to Terry Fleming, RIMS board member and risk manager for Montgomery County (Maryland), the association’s members have been asking the group to come out with a stronger position against these supplemental compensation programs.

He said the organization decided to produce the new policy statement after a number of CEOs at the recent RIMS annual meeting took a “wait-and-see” attitude towards proposed alternative supplemental payment plans, some of which pay contingent fees prospectively or vary with the size of the account or brokerage involved.

Fleming said RIMS is “extremely concerned” that some of the same brokers that promised risk managers they would not accept contingent fees a few years ago are now considering reneging on that promise and accepting alternative contingent fees.

The compensation plans being questioned traditionally involve payments to brokers after they place a certain volume of business with an insurer or meet other performance criteria such as profitability or business retention.

However, the structure of contingent plans has been changing in response to criticism. Several insurers, including Chubb and Travelers, are promoting alternative supplemental plans, which pay brokers prospectively for achieving certain volumes or performance goals. Critics say these prospective plans have the same effect as traditional retrospective plans.

Fleming said the RIMS opposition to contingencies applies to prospective as well as retrospective plans and to agents and brokers regardless of size.

At a CEO panel during the RIMS annual meeting in early May, executives from several of the largest brokerages were given an opportunity to denounce contingent payments but did not clearly do so.

Marsh CEO Brian Storm claimed the issue must be addressed as part of the bigger issue of how to pay for improvements brokers make in the insurance process.

“Marsh is going to take its time with this issue. We want to know how our clients, how the industry feels about it. We certainly understand transparency as well or better than anyone. I think that we’ll come to a conclusion that is good for the industry, not just for Marsh,” Storms told the RIMS audience.

Gregory C. Case, president and CEO, Aon Corp., indicated that contingencies were still in play at his firm.

“One observation I would make, and from Aon’s standpoint, we don’t know what the definition of supplemental is. We can’t take the answer as ‘no’ right now. I don’t know what it means. We’ve seen multiple agreements; we’ve seen lots of different ideas. But … we will absolutely never do anything that’s going to jeopardize the relationship we have with our clients,” Case maintained.

Patrick Gallagher Jr. chairman, president, CEO, Arthur J. Gallagher & Co., suggested that the commitment that his firm and others have made to making all compensation plans transparent eliminates any potential conflict of interest cited by critics of contingencies.

“I think that is really a huge change over the last 18 to 24 months. And what that does is allow for that discussion … where we sit down with our client and say, ‘Now, it’s up to you. If the value is there, how do you want to pay them?'” said Gallagher.

Absent from the RIMS panel was Joseph Plumeri, CEO of the large broker Willis Group Holdings. Plumeri’s firm has stood out for its strong vow not to accept any form of contingent payments, which is now the RIMS position.

After a review of the prospective compensation plans recently proposed by certain carriers, Willis renewed its vow. Plumeri said his firm would not be accepting these new incentive arrangements because in its opinion they fail to fix the conflicts associated with the contingent commissions they are meant to replace.

The new plans allow agents to know at the beginning of the year what their bonus check will be at the end of the year. With many traditional contingency programs, agents do not know what they will get at the end of the year because they don’t know if they’ll be profitable.

“They have performance-driven elements that make lump-sum payments contingent on factors such as retention, growth and profitability – features that rendered contingent commission plans incompatible with conflict-free transparency and our clients’ best interests. Such supplemental compensation plans are best housed in an agency relationship,” Willis said in its statement.

RIMS is urging its members to enforce the anti-contingency policy in their dealings with brokers but Fleming said the risk managers would also support a prohibition through legislation or regulation.

He said risk managers can’t tell the insurance industry how to structure its compensation but the group can make known its opposition to a particular form of compensation.

The large risk management organization is also supporting full disclosure of “all sources of compensation, direct and indirect, now or in the future” even where buyers fail to request it.

“The existence of compensation arrangements and the amount of potential compensation should be disclosed prior to placement of business and annually by line of coverage. Failure to disclose such arrangements runs counter to the spirit of partnership that risk managers seek to achieve with their brokers, vendors, and insurers,” the RIMS policy says.

RIMS urged its insurance buying members to evaluate their relationships with brokers and take action to correct situations where transparency and full disclosure are not followed.

“To effect change, risk managers must vocalize their concerns and hold their providers accountable,” RIMS maintained.

The RIMS policy position is likely to fuel further debate in an insurance community divided over the issue of contingent commissions.

Some brokers and large insurers have agreed to stop using them. But groups representing Main Street independent agents — many of them small and medium-sized businesses — have vehemently fought attempts to expand the ban to them.

While broker Willis has been outspoken in its rejection of any contingent compensation, insurer Liberty Mutual has gone to court to retain the right to pay contingent commissions.

Other brokers and insurers maintain that a policy of transparency — simply making known whatever compensation plans they utilize — eliminates any conflict. But RIMS has now decided transparency is not enough.

The complete policy statement from RIMS follows:
RIMS Statement on Industry Compensation and Placement Practices

Much has changed since RIMS issued its August 2005 statement on industry compensation and placement practices. In response to regulatory matters and settlement agreements, many brokers pledged to refuse to accept placement fees from insurers on business where they represent the buyer. RIMS applauded this action and supported the prohibition on the use of placement service agreements or other similar arrangements for the entire broker industry. We are disappointed to learn that some brokers are apparently reconsidering their pledge to refuse to accept these fees.

RIMS recognizes that contingent commissions are currently paid on agency generated business, where the agent represents the insurer not the buyer. Such practices have always existed in the insurance markets. However, for brokers and independent agents to accept these fees in transactions that are made on behalf of the buyer represents an inherent conflict of interest. The recent investigations, admissions and fines demonstrate how these practices can be manipulated to the disadvantage of the insurance buyer.

RIMS also recognizes that many smaller, regional or privately held brokerage firms were not part of the various investigations and settlement agreements and have continued to utilize placement service agreements and contingent compensation arrangements. For the reasons listed above, RIMS supports the prohibition of these compensation arrangements for any broker or agent acting on behalf of a buyer. Moreover, RIMS believes that all sources of compensation, direct and indirect, now or in the future, should be disclosed to clients without their request. This disclosure will ensure that the risk manager understands not only the cost of coverage, but any arrangements with specific insurance companies or any fees obtained by the broker/agent from markets approached on behalf of the insured. The existence of compensation arrangements and the amount of potential compensation should be disclosed prior to placement of business and annually by line of coverage. Failure to disclose such arrangements runs counter to the spirit of partnership that risk managers seek to achieve with their brokers, vendors, and insurers.

Furthermore, RIMS is troubled that the insurance industry continues to promote this compensation model despite its many associated issues. RIMS supports a business model for the insurance industry which does not provide for, offer or make available contingent commission arrangements for the brokerage industry.

RIMS advocates for an open dialogue among all parties on all issues of compensation, as well as all other aspects of the insurance transaction. RIMS believes that broker compensation and insurer selection should be governed by the principles of complete transparency and full disclosure without client request. Only then can risk managers make full and informed decisions as to which coverage and method of placement is best for their organizations.

Risk managers must evaluate the level of transparency and full disclosure in their broker relationships. To effect change, risk managers must vocalize their concerns and hold their providers accountable.”