New York Hearings Pit Agents Against Compensation-Reformers

By | July 17, 2008

A top executive for a key insurance broker urged New York regulators to quash the practice of insurance agents taking contingent commissions, despite calls from agents that the practice would hurt their businesses, and do nothing to improve the insurance industry.

At a public hearing earlier this week in Buffalo, Don Bailey, chief executive officer of Willis North America, publicly challenged New York regulators to end contingent commissions in the insurance marketplace within three years. Those comments were directed at representatives from the Insurance Department and Attorney General’s office of New York, which are holding the joint hearings as part of a fact-finding process.

Willis was the first of several major insurance brokerages to agree to end the practice of taking the commissions and improve efforts to increase transparency in how the firm is paid by insurers. Bailey said Willis remains committed to that goal, and will seek to end the practice at Virginia-based rival Hilb Rogal & Hobbs Co., which it is buying for $2.1 billion.

“Full transparency is a threshold issue in terms of the conversation we are having,” Bailey testified during the hearing in Buffalo. “Clients need to be absolutely certain that their brokers keep their interests paramount; otherwise, they will question the integrity of the services we provide.”

The hearings are shedding light on a problem with the way the industry is regulated following a series of landmark settlements in 2004 and 2005, when several of the industry’s largest brokers were banned from accepting contingent commissions — while all others still can. As far as regulators and the industry are concerned, there remains a gap between the regulated and the regulated-nots when it comes to commissions and what clients are told about how agents get paid.

The courts recently threw an interesting and timely cog into the compensation hearings: Last month, a New York court ruled it was legal for Boston-based Liberty Mutual Group to pay contingent commissions to brokers, calling into question the decision of those other brokers and insurers to voluntarily give up those practices.

The ongoing hearings pit those who say they favor ending contingent commissions and mandating commission disclosures to clients, and those who prefer to keep contingent commissions and have voluntary disclosure if clients ask for it.

Independent agents have generally lined up on the latter side of that issue.

David M. Gelia, executive vice president of United Insurance Agency Inc. in Amherst, N.Y. and a past president of the Independent Insurance Agents and Brokers of Western New York, said transparency is fine but it’s not necessary to ban methods of payment.

“Our agency strives for an environment of open communication with our customers. If requested by the customer, we will voluntarily disclose the nature and form of our compensation,” he said at the Buffalo hearing.

But efforts to ban certain compensation arrangements are unnecessary, he said, adding that the best solution to address concerns over those arrangements would be voluntary disclosure on the part of agents.

“It has been our experience to date that very few customers are interested in this information, in fact we have been asked for information about our compensation only a handful of times in my 24 years in this business,” he said.

The two remaining hearings will be held in Albany on July 23 and Manhattan on July 25.

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