Survey Shows Majority of Risk Managers Say Contingent Commission Practice is Conflict of Interest

May 24, 2004

A majority of commercial insurance buyers believe that the commission arrangements between insurance brokers and insurance carriers, known as contingent commissions or placement service agreements (PSAs), are a conflict of interest, a new survey has found. The survey also revealed that the buyers feel that they receive inadequate disclosure from their brokers about these agreements, which currently are under investigation in at least three states.

The survey, which was conducted by Advisen Ltd., a provider of information, analytic and benchmarking tools for commercial insurance professionals, also found that 56 percent of these professionals believe their current broker does not disclose contingent commissions in all cases.

Less than 20 percent of the buyers at the 330 surveyed companies felt the level of disclosure they received from their insurance brokers about contingent commissions was entirely adequate. More than two-thirds of the respondents (69 percent) opined that the commissions represented a conflict of interest.

“There was a growing supposition in the media and the market that buyers had just accepted these arrangements as status quo, so Advisen decided to ask a representative sample how they truly felt,” said Jim Blinn, principal, at Advisen. “The question around this extremely potent issue is simply this: are clients well-informed about the process of their insurance policy purchase and whose interests are being best represented?

“For commercial insurance buyers, this comes down to a question about the transparency of information in the markets,” Blinn said.

Several risk managers voluntarily offered extended comments on the practice. One risk manager summarized the issue of conflicts saying, “My gut feeling is there is probably a conflict of interest. The secrecy of the brokers seems to support this notion; otherwise they would be more forthcoming.”

Another buyer commented on the disclosure problem, offering “They (the brokers) only give me information they deem is appropriate and on their terms. This is, of course, an unsatisfactory and untenable position.”

The survey also found that most risk managers (56 percent) believe that if the commissions were eliminated, insurance costs would be unaffected, while the remaining respondents were equally split (22 percent each) between expecting costs would increase or decrease without the contingent commissions.

In April, contingent commissions became the subject of two separate investigations by the states of New York and California, both of which are looking into claims of conflicts of interest. Connecticut also announced an investigation in May. Contingent commissions are compensation that brokers receive from insurance carriers when they place insurance policies with those carriers, which is in addition to standard commissions or fees they receive from their clients. The commissions from carriers are seen as rewards for placing business at one carrier over another, but some claim such payments lead to favoritism that may not be in the client’s best interest. Brokers counter that these agreements lead to efficiency in the transaction process and give them leverage with insurers to achieve the best terms for their clients.

The survey was conducted via e-mail and telephone from May 13-20, 2004; risk managers at 330 organizations completed the survey.

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