Large Brokers Freed to Go After Contingent Commissions But Will They?

The nation’s largest insurance brokers have received the go-ahead to begin accepting contingent commissions again – but two of them say they won’t do it.

Officials in New York, Illinois and Connecticut have agreed to amend agreements under which the three largest insurance brokers – Aon, Willis and Marsh – have been banned from accepting contingent commissions since Jan. 1, 2005, while other brokers have been free to accept them.

The state officials said the three brokerage firms have complied with the terms of the 2005 agreements and that the time had come to level the playing field regardless of size.

“It reflects the desire by the five regulatory and legal authorities involved to help consumers by providing a level playing field for insurance intermediaries on which they can easily be compared,” the New York State Insurance Department said.

The agreements in effect created a two-tiered system under which the largest brokers have been operating under a ban against contingent income, while middle market and smaller brokers have been free to continue accepting these commissions. Big brokers had argued the rules should be universally applied.

Contingent income includes insurer payments to brokers that are based on volume or profitability of business placed with the carrier. Critics, including risk managers, contend such pay plans can be a conflict of interest – that they can encourage brokers to place business with a carrier in order to qualify for extra income rather than with a carrier that is best for the client.

The decision to lift the ban became known after the New York department issued a new regulation requiring all producers regardless of size to disclose their compensation to customers when asked. Aon, Marsh and Willis have agreed to honor the disclosure standards in this New York regulation, standards that are actually lower in some respects than those they have been following since 2005.

At the same time they were setting new disclosure standards, the state officials appeared to be willing to abolish the ban on contingent income for the sake of consistency. “This means one clear standard will apply throughout New York for all insurance consumers and nationally for all customers of these brokers,” the NYSD statement said.

No Contingents

Despite the potential for restoring a lost revenue stream, Willis and Aon – the largest and third largest brokers – say they have no plans to return to accepting contingent commissions.

Willis stopped accepting contingent commissions in 2004 and has built its reputation in the market in part on this stance. According to CEO Joseph Plumeri, Willis’ policy isn’t going to change.

“We actually took a big step forward to building trust with our clients when contingent commissions were banned for the largest brokers in 2005,” Plumeri said at a recent meeting in London. “At Willis, we’ve abolished them, and we’re not going back. We’re a better company for it.”

Aon, too, seems disinclined to go back to the days of contingent income.

“We stopped taking contingent commissions in 2004 and we have no current plans to begin taking them,” spokesman David Prosperi said.

Aon is pleased with its revenue growth under its current model, according to Prosperi. From fiscal year 2006 to 2009, revenues grew 13 percent from $6.7 billion to $7.6 billion.

“Judging from how our company has performed in terms of revenue growth, market share and client retention since 2005, we feel we are at a definite advantage in terms of how we are delivering value to our clients and attracting new business,” Prosperi said.

The second largest broker, Marsh, did not disclose its plans. Marsh said it collected $845 million of contingent fees in 2003, and another $420 million through June 30 of 2004, the year it stopped accepting them.

The industry’s fourth-largest broker, Arthur J. Gallagher & Co. was also under a similar ban, but resumed taking contingent income last October, thanks to a revised agreement with Illinois regulators. Gallagher said then that it anticipated generating about $10 million a year by 2011 from contingent commissions.

Topics New York Agencies Legislation Profit Loss Aon