Insurers Address Brokerage Income Directly to Consumer

Some Carriers Issue Endorsements on Producer Compensation Disclosure

Just last week, one of the assistant directors at our firm, Brunie Lugo, was routinely reviewing a client’s renewal quotation she had received, checking it for accuracy, reviewing the pricing and proposed renewal endorsements, etc.–standard procedures before sending it on to the client. Brunie noticed that on this particular quotation, an endorsement was listed as being added at renewal, titled “Important Notice Regarding Independent Agent and Broker Compensation,” and she asked me about it. Neither she nor I had ever heard of such a form, so she requested that the underwriter send us a copy. What we received was very interesting, yet not surprising in the current environment of full brokerage income disclosure.

The endorsement in question reads as follows:

“Your independent agent or broker may receive a commission from us for placing your insurance with us. Your agent or broker may also receive additional compensation based on their overall relationship with us or for writing additional policies with us. As in other industries, this additional compensation rewards these producers for such things as achieving pre-set profitability goals, volume levels, growth targets, sales contest objectives or other measures we may set. Please direct any specific questions about your insurance representative’s compensation to him or her.”

This was, to put it mildly, enlightening. Since the end of 2004, when New York Attorney General Spitzer’s investigations of the insurance industry were just beginning, many insurance agents and brokers formally advised their clients of their compensation practices, either via letters mailed directly to them, postings on their Web sites, or both. Subsequently some of the larger brokers announced they were no longer engaging in additional compensation arrangements with insurers based on volume and growth. But the only way the insurance companies were advising insureds of their brokers’ compensation arrangements was, if at all, through general announcements on their Web sites. Was anything else really necessary?

The issue of producer income disclosure is not a new one, especially for New Yorkers. What is new, however, is that insurers are becoming involved in the disclosure process.

Mark Schussel, a spokesperson for the Chubb Group of Companies, said the company posted on its Web site, July 15, 2005, an announcement, “Producer Compensation Practices for U.S. Insurance Transactions,” describing standard commissions, contingent commissions, and additional compensation.

Carmen Duarte, spokesperson at OneBeacon, pointed out that, like Chubb, OneBeacon has had a link on its Web site, which discusses producer compensation disclosure for the past six months.

Both Schussel and Duarte were surprised that an insurer would take disclosure a step further via issuance of an actual policy endorsement.

Brokers overall are not very concerned about the increased disclosure on the part of insurers. Albert (Skip) Counselman, president of Baltimore broker Riggs Counselman Michael & Downes, said that the more disclosure for clients regarding brokerage compensation, the better.

“I am not at all troubled by insurers including endorsements or notices on policies regarding producer compensation. In the past, we routinely disclosed producer compensation information only to risk management (larger) clients, and to smaller clients when they asked. We have amended our practice to provide such information to all clients. The amount of detail provided to clients ranges from very specific for clients with fee and fee/commission arrangements, to a generalized description for small commercial and personal lines clients,” Counselman said. He thinks full disclosure is, at the end of the day, good for client relationships.

Richard Sullivan, president and chief executive officer of New York broker CM&F Group Inc., said it may be better for the issue of disclosure to be left up to the producer, adding that income disclosure in the insurance industry dwarfs that of any other industry. “No other industry, as a matter of course, states the manufacturer’s price, as well as the mark-up, at the retailer level,” Sullivan said. “Why introduce an explicit statement that may only seed contentious views of the relationship with the broker/agent?” he said. “I’ve no problem sharing the information if queried by the client.”

In other states, brokerage income disclosure does not have the same level of importance. For example, the Texas Department of Insurance has not yet mandated the disclosure requirements that New York has imposed.

“We are committed to full disclosure and have done so when requested by the client,” said Steve Smith, president of Dallas-based broker Wm. Rigg Co. “However it has not been much of an issue, even with our publicly traded clients.” Smith feels that in the current environment, insurer disclosure via endorsement may not be a bad thing.

Agent and broker advocacy groups do not take such an optimistic view of insurers’ involvement in producer income disclosure.

Dick Poppa, president and chief operating officer of the Independent Insurance Agents & Brokers of New York Inc., said the issue of producer compensation should be handled at the producer level, since that is where the true client relationship exists, and doesn’t think insurers should be involved. “We don’t think it’s necessary or prudent in today’s world. It basically emphasizes the wrong piece of the relationship–the focus is on producer compensation, and not the services provided to the client.” Poppa added that insurers should never require their agents and brokers to disclose income.

In addition, Poppa noted that there is one important path that insurers should not go down–putting specific commission percentages on the declarations page of the policy.

Of course, some agents and brokers feel there is a conspiracy at hand when it comes to producer compensation disclosure. Theorists propose the idea of insurance companies dictating terms of compensation disclosure is just another example of the jumbo brokers exerting pressure on insurers; to the detriment of smaller regional agents and brokers whose profit margins are much thinner than those of their larger competitors. The theory is that, once fully divulged, it invites the client to begin dialogue about income reduction, and keeps smaller brokers away from larger fee-based clients.

It remains to be seen whether more insurance companies directly advise insureds of producer income–and whether such disclosure is in fact ultimately good for the insurance buyer.

Robert Meder is director of marketing at Hagedorn & Company, is a privately-held retail insurance brokerage with offices in Manhattan and Ossining, N.Y.

Topics Carriers New York Agencies Profit Loss