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A Brief History of Contingent Commission Agreements

ATTENTION: It is possible that this information may no longer be current and therefore may be inaccurate. The index contains both open and closed cases and is not a complete list of cases in which an ACE Insurance Group company is involved. This information is provided to give interested persons an idea of the issues disputed in the indexed cases. For a full understanding of a case, one should read the rest of the court file, including the response. For the most up-to-date and complete information on a case, visit www.pacer.gov or contact the clerk of the relevant court.

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A Brief History of Contingent Commission Agreements
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Home > Magazines > West > Feb 7 2005 > Features
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A Brief History of Contingent Commission Agreements
By Roger Wade February 7, 2005
Contingent commissions first appeared in the 1960s when claims were rising much faster than the rate of inflation and insurance companies cut agent commissions on premiums. To make up for this loss of revenue, carriers offered agents contingent commissions of about 5 to 10 percent of premiums if the agents could meet certain volume and profitability goals. These first contingent commissions were paid on personal lines. In the late 1970s and early 1980s, insurance brokers were receiving money from both sides of the transaction. As the fees were paid for a book of business encompassing numerous clients, it was difficult to determine the impact of individual clients. Therefore, there was little regulatory investigation into the practice, although customers began questioning brokers about the arrangements. Meanwhile, some brokers used the London market to buy excess coverage for their clients. The commissions they received on these products were usually not fully disclosed to regulators or customers. The practice increased regulatory and client scrutiny on broker compensation. Today, contingent commissions among the 100 biggest insurance brokers operating in the U.S. comprise as much as 12 percent of their annual gross revenues and average about 7 percent of their top line. Contingent commissions were never seriously questioned because they provided a mutually agreeable arrangement: the brokers brought carriers greater volumes of business and at the same time, brokers worked to keep down loss ratios for the policies they sold. In return, the brokers got bonus payments from the insurers. The only problem--and it was by no means a small one--came from the fact that the insurance buyer was also paying the broker. Although this
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A Brief History of Contingent Commission Agreements
http://www.insurancejournal.com/magazines/west/2005/02/07/f...
didn't exactly amount to double-dealing, it did confuse the question of just who brokers were ultimately serving. As contingent commissions grew into an important revenue source, some national brokerages pushed their people to write more policies for insurers who paid them. By the late 1980s, the practice had become widespread. At this point, many brokers were more focused on earning those contingent commissions than getting customers the best deal. But the arrangements were generally unknown about outside the insurance industry. By the mid-1990s, the situation was complicated even further as insurance transactions began to be placed nationally, rather than locally. Contingent commissions represented a significant portion of a brokerage's profits, so it was incumbent on brokers to ensure that business went to the right insurer--the insurer who paid the highest fees, that is. To make that happen, some unscrupulous brokers deemed it necessary to generate "friendly bids" that would never be as cheap or had terms as favorable as the preferred carriers'. While end buyers thought they were getting several honest bids, they were actually being presented with offers designed to steer them toward the carrier that paid the best contingent commission. But this was never disclosed to the customer. And it is unclear how much regulators knew about the details of the practice. As recently as April 2004, the Risk and Insurance Management Society, the trade association representing the interests of commercial customers, looked into these arrangements and concluded that they "are endemic to the manufacturer/distributor relationship, and there is nothing inherently wrong with them." Smaller, regional brokerages have steered clear of the issue simply because they can't generate the volume of business that national and international brokers can for the carriers. Therefore, the smaller brokerages have managed to stay clean by default. Some large national brokerages also avoided the controversy through a decentralized organization that did not make the shift from local to national transaction placement. Despite the controversy surrounding the practice, it is still possible to use contingent commissions ethically. There seems to be a broad consensus that three simple rules need to apply in each case: (1)buyers must be informed if such an arrangement is in place; (2)the agreement doesn't create bias in brokers as to which carrier customers should use, and, (3)obviously, all false or friendly bids should be eliminated from any list of possibilities offered to a client. Roger Wade is senior manager of KPMG's casu-alty/actuarial practice. This article is reprinted with permission from KPMG's Insurance Insider. Copyright 2005 KPMG LLP. All rights reserved. Disclaimer: All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity.
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