A Conflict of Interest or Acceptable Payment for Services Performed?
Part One
It was recently announced that Arthur J. Gallagher, the world’s fifth-largest broker, has received permission to receive contingent commissions from insurers. This announcement has been met with both positive and negative comments. Insurance brokers applaud the announcement as a way to level the playing field, while Risk Managers have condemned it.
What is it, and why should I care?
Contingent commissions are commissions paid to insurance brokers or agents by insurance companies based on the total volume of premiums written by the carrier and produced by the broker/agent. There are many formulas used but the rationale has been that brokers/agents serve a valuable service for the insurers and thus should be compensated. Brokers serve as the insurers’ marketing channels. They also perform services for the insurers such as issuing auto ID cards, certificates of insurance, processing invoices, and dispensing premiums.
So why the big uproar?
Well, several years ago, then-NY Attorney General Elliot Spitzer began investigating the practice of paying contingent commissions, claiming it was a conflict of interest. His point was that if the broker received a fee from clients to be their “independent insurance broker,” how could the broker be independent if he/she was also receiving monies from an insurer?
The brokers have stated that they deserve compensation for performing the services for the insurers. Mr. Spitzer’s investigation did reveal that some people did actually steer business to specific insurers based upon the amount of these commissions. Well a few bad apples indeed spoil it for the whole barrel. Mr. Spitzer’s very public findings forced the largest publicly traded brokers to give up the practice of receiving these commissions. But not all insurance brokers or agents agreed and most did not give up the practice and in fact, still receive these commissions.
Fast-forward to today, and the large brokers have claimed that not being allowed to accept the commissions while their smaller competitors do creates an uneven playing field. The Risk & Insurance Management Society (RIMS) and other Risk Managers claim that all brokers should give them up.
The bottom line is the bottom line. With the amount of revenue that broker’s receive on an annual basis, there is no way that they would be willing to voluntarily give up those commissions. And with the Brokers that state they will NOT receive “contingent commissions” (as one CEO of a large broker has publicly stated), they will look to make up the revenue in other ways. They will either increase fees or raise their direct commission rate. Anyway you slice it; the consumer will be paying these costs.
