Bonus round

Last November, then-New York Attorney General Eliot Spitzer notified four insurance companies that they could no longer pay contingent commissions to agents and brokers who sell automobile, homeowners and certain other insurance products. The four companies — ACE, AIG, St. Paul Travelers and Zurich — had to stop paying contingent commissions on Jan. 1, 2007, in keeping with settlements they entered into to resolve charges of bid rigging and other improprieties related to their dealings with large insurance brokers.

There was an immediate outcry from independent agents. Main Street agents defended contingent commissions as American as apple pie and maintained that enforcing the ban against them for the sins of mega-brokers was grossly unfair.

“The solution imposed on carriers and agents of banning incentive compensation is totally misplaced and directed at business that was never a problem to begin with,” said Independent Insurance Agents & Brokers of America CEO Robert A. Rusbuldt at the time.

Since then the insurers have gone about implementing new pay plans. As the details are becoming known, agents are discovering they’re not so bad. They might even be better than the old plans. Agents like the new plans because they guarantee a percentage at year’s end for making performance goals, whereas under the old plans there was no guarantee and the agency had no idea of what it might get at year’s end.

In a January 2007 interview with Insurance Journal, IIABA’s Rusbuldt, and David VanDelinder, his counterpart at the Independent Insurance Agents of Texas, said agents have been generally pleased with what Chubb, Travelers and other insurers appear to be doing with the new plans. “Agents will be able to plan for the future. They will know at the beginning of the year what their bonus check will be at the end of the year,” said Rusbuldt, who sensed that for agents who have seen the new plans, it’s “so far, so good.”

VanDelinder added that the new programs appear to compensate agents for “exactly the same performance that they did under the old compensation agreements,” including growth, profitability, retention and other factors. “So there is really no change in the basis of that compensation,” he said. “It’s really a change in the manner in which it’s paid.”

It may be so far, so good, but it’s not over. Global broker Willis Group says it is not sure it can go along with the new plans out of concern that they may be just as conflict-ridden as the old ones. In a statement released March 1, Willis said: “After our preliminary review, it is unclear whether these proposals create perceived conflicts similar to those created by contingent commissions. In 2004, we were the first industry participant to disavow contingent commissions — paid on similar parameters — not because we had to but because we wanted to as it was the right thing to do. While the industry continues to define this compensation, we believe that these new arrangements must be devoid of conflicts, fully transparent to our clients and must not erode the fundamental client-broker relationship.”

If a broker the size of Willis decides the new plans are dirty, will other large brokers — and public officials — come to the same conclusion and force insurers to wipe the slate clean again?

A recent study found that more than 80 percent of pre-tax profit in an average agency is attributable to incentive compensation. As VanDelinder observed, “These companies are tampering with a very important part of their compensation. It makes agents very nervous.”