After a review of the supplemental compensation plans recently proposed in the marketplace by certain carriers, Willis Group Holdings reported that it will not be accepting these incentive arrangements because, it says, they fail to fix the conflicts associated with the contingent commissions they are meant to replace.
Contingent commissions have come under fire by some attorneys general and been prohibited by settlements between these officials and several major insurers. Travelers and Chubb are among the insurers that have announced plans to replace contingent commissions with supplemental programs.
But in Willis’ opinion, the new supplemental incentive pay plans are unacceptable — even if government watchdogs approve them — because they raise the same conflicts that were associated with contingent commissions.
According to agent association leaders, 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 a statement.
According to Willis, compensation plans for brokers “need to meet the criteria of complete transparency and equity on each policy placed.” The client has to be sure that the broker is acting objectively to get the best deal done for the client, in Willis’ view.
“As currently designed, the proposals do not afford a conflict-free environment for the client and we are not going to take them,” said Joe Plumeri, chairman and CEO of Willis. “It’s not about being allowed to take them because a government authority or industry regulator says we can take them. For Willis, it’s about making a principles-based decision because it’s the right thing to do and is consistent with our Client Advocacy model. The proposals we have considered are based on ‘if-then’ equations and it does not matter whether the math is done on a prospective or retrospective basis; either way, we view these as contingents.”
In his address to the UK’s Financial Services Authority at the Annual Insurance Sector Conference in March, Plumeri spoke about a principles-based approach to regulation and to running the entire insurance industry.
“The outcome of a principles-based approach, practiced globally and with regulatory flexibility, will be that clients have confidence and faith in the industry — and that is a must for everyone involved,” he noted.