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June 18, 2007

Risk managers take strong stand against contingent commissions

RIMS issues new policy statement denouncing such incentive pay for all agents and brokers, whether Wall Street or Main Street

The largest association of commercial insurance buyers has stepped-up its opposition to the acceptance of contingent compensation by any agent or broker, calling such compensation “an inherent conflict of interest” in a strongly worded policy restatement.

The 10,000-member Risk and Insurance Management Society (RIMS) said it is “troubled” that some in the insurance industry continue to promote contingent compensation even after “recent investigations, admissions and fines demonstrate how these practices can be manipulated to the disadvantage of the insurance buyer.”

“RIMS supports a business model for the insurance industry which does not provide for, offer or make available contingent commission arrangements for the brokerage industry,” the group said in its revised policy statement.

For any broker or independent agent to accept these fees “represents an inherent conflict of interest,” according to RIMS, which called for an end to contingencies.

RIMS had issued a policy position in 2005 that criticized contingencies but which did not call upon the insurance industry to discontinue them as the current policy does.

According to Terry Fleming, RIMS board member and risk manager for Montgomery County (Maryland), the association’s members have been asking the group to come out with a stronger position against these supplemental compensation programs.

He said the organization decided to produce the new policy statement after a number of CEOs at the recent RIMS annual meeting took a “wait-and-see” attitude towards proposed alternative supplemental payment plans, some of which pay contingent fees prospectively or vary with the size of the account or brokerage involved.

Fleming said RIMS is “extremely concerned” that some of the same brokers that promised risk managers they would not accept contingent fees a few years ago are now considering reneging on that promise and accepting alternative contingent fees.

New compensation plans

The compensation plans being questioned traditionally involve payments to brokers after they place a certain volume of business with an insurer or meet other performance criteria such as profitability or business retention.

However, the structure of contingent plans has been changing in response to criticism. Several insurers, including Chubb and Travelers, are promoting alternative supplemental plans, which pay brokers prospectively for achieving certain volumes or performance goals. Critics say these prospective plans have the same effect as traditional retrospective plans.

Fleming said the RIMS opposition to contingencies applies to prospective as well as retrospective plans and to agents and brokers regardless of size.

At a CEO panel during the RIMS annual meeting in early May, executives from several large brokerages were given an opportunity to denounce contingent payments but did not clearly do so.

Marsh CEO Brian Storm claimed the issue must be addressed as part of the bigger issue of how to pay for improvements brokers make in the insurance process.

“Marsh is going to take its time with this issue. We want to know how our clients, how the industry feels about it. We certainly understand transparency as well or better than anyone. I think that we’ll come to a conclusion that is good for the industry, not just for Marsh,” Storms told the RIMS audience.

Gregory C. Case, president and CEO, Aon Corp., indicated that contingencies were still in play at his firm.

“One observation I would make, and from Aon’s standpoint, we don’t know what the definition of supplemental is. We can’t take the answer as ‘no’ right now. I don’t know what it means,” Case maintained.

Patrick Gallagher Jr. chairman, president, CEO, Arthur J. Gallagher & Co., suggested that the commitment that his firm and others have made to making all compensation plans transparent eliminates any potential conflict of interest cited by critics of contingencies.

Absent from the RIMS panel was Joseph Plumeri, CEO of the large broker Willis Group Holdings. Plumeri’s firm has stood out for its strong vow not to accept any form of contingent payments, which is now the RIMS position.

After a review of the prospective compensation plans recently proposed by certain carriers, Willis renewed its vow. Plumeri said his firm would not be accepting these new incentive arrangements because in its opinion they fail to fix the conflicts associated with the contingent commissions they are meant to replace.

“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,” Willis said in its statement.

Anti-contingency policy

RIMS is urging its members to enforce the anti-contingency policy in their dealings with brokers but Fleming said the risk managers would also support a prohibition through legislation or regulation.

He said risk managers can’t tell the insurance industry how to structure its compensation but the group can make known its opposition to a particular form of compensation.

The large risk management organization is also supporting full disclosure of “all sources of compensation, direct and indirect, now or in the future” even where buyers fail to request it.

“Failure to disclose such arrangements runs counter to the spirit of partnership that risk managers seek to achieve with their brokers, vendors, and insurers,” the RIMS policy says.

RIMS urged its members to evaluate their relationships with brokers and take action to correct situations where transparency and full disclosure are not followed.

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Insurance Journal West June 18, 2007
June 18, 2007
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