Willis Abolishes Contingency Pacts; Sees Opportunity in New ‘Level Playing’ Field Among Insurance Brokers

October 21, 2004

  • October 21, 2004 at 2:01 am
    Richard Faulkner, Esq. says:
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    This is a very positive step toward reaffirming the integrity of honest insurance brokers. It is critical that clients know that they can actually trust their broker to act in their best interest. Clear, transparent fee arangements are essential and will go a long way toward restoring true competition in the market. Once the deleterious effects of price fixing are eliminated, competition based on service and innovation will govern the market. This action is not only the right thing to do, but will position Willis to do very well for its clients and itself.

  • October 21, 2004 at 3:28 am
    Chris Pennock says:
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    Who do you work for?

  • October 22, 2004 at 8:14 am
    Chris Pennock says:
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    I couldn’t agree with you more. My question was based on the Willis representation that they are the knight in shining armour which I find hard to believe. I’m sure that more dirt will come out of all of this and that Willis will not be unscathed. The announcement looked to me to be an opportunistic approach to garner disgruntled Marsh clients when thier own backyard is dirty.
    When handled ethically the process is good and anything that works toward that result is a good thing. Your response gave the impression that Willis’ motives are pure. In the final analisys I think you’ll find that to be incorrect. I think they are looking at this as simply a way to ” Dog pile on Marsh”. Let it be known I’m not a Marsh fan and have no affiliation with them I just don’t believe Willis. It will all come out in the wash. Here’s to hoping I’m wrong.

  • October 22, 2004 at 10:20 am
    Sharon says:
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    In CA, the Insurance Code 31 says an Insurance Agent means a person authorized, by and on behalf of an insurer, to transact all classes of insurance other than life insurance.

    Insurance Code 33 says and Insurance Broker means a person who, for compensation and on behalf of another person, transacts insurance other than life with, but NOT on behalf of, an insurer.

    So if an agent works on behalf of an insurer and a broker NEVER works on behalf of an insurer, what does an agent/broker do? Who does he work for?

    Also,if an independant broker has to have an agency contract with an insurer before he can sell their product and in exchange, that insurer provides the broker with in-kind services such as leads, advertising, marketing,forms etc.; and even has the broker direct insureds from the insurer’s preferred vendor list, then how is a broker able to work in the insureds best interest, when his business is dependant on working under the direction and on the behalf of the insurer? Doesn’t that put the independant broker in an ethical delimma of having to choose to represent the insured ONLY as his fiduciary duty requires or losing his bread and butter if he does not do what the insurer wants him to do on their behalf?

    It seems to me that this issue goes far deeper and is much more insidious than just a little bit of extra commissions for the independant broker. It seems to me that independant brokers are often times having to choose between keeping their ethics in tact or keeping their wallets in tact. And when they choose their wallets, the insured are the ones who really lose.

    Am I right or just not well informed?

  • October 22, 2004 at 1:07 am
    Richard Faulkner, Esq. says:
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    I am an attorney, former judge and law professor. I don’t “work for” anyone, and certainly not the subject of the article. Before becoming a full time Neutral long ago, I represented both insurance carriers and claimants. Based on decades of experience, and knowledge of the great suspicion of many about the insurance industry, anything that enhances trust and transparency will be very helpful.

    The fact is that the vast, vast majority of the people in insurance are honest, ethical, truly looking out for the best interest of their clients, and essential for commerce. Yet, many people have long regarded the industry as a conspiracy designed to overcharge them and avoid paying legitimate claims. Just sit in a courtroom during jury voir dire and listen to their comments!

    The recent disclosures in New York, along with memories of Enron, WorldCom etc. will only fan the existing flames of suspicion and cynicism. Anything that may start to counteract those fears and perceptions will be beneficial to the industry, and to business in general.

  • October 22, 2004 at 1:11 am
    Joseph D Timmons says:
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    While I have a problem with contingents based solely on volume of business direct to a market, I must absolutely defend the contingent payment that is based on sound underwriting judgement. As a general agent with underwriting authority, I strive to put good business with the markets I represent. The contingent commission arrangement incents my staff to make those sound judgements. The market place will ultimately level the field between competing markets such that pricing to the insurance consumer is at its lowest level inspite of contingent underwriting agreement.

    If the insurance producers that have such arrangements available lose that incentive, the insurance consumer will ultimately pay a higher price for coverage because I, as a business owner cannot afford to write the business at breakeven or with a slight amount of profit, expecting to be compensated on the back side with a contingent payment based on sound underwriting decisions. I will have to insist on a higher commission level from the market I underwrite on behalf of in order to provide that service. That additional cost is just passed on to the insurance buyer. I no longer have the incentive to make good underwriting judgements, thus the insurer may have worse loss ratios and again need to raise rates to pay for the losses.

    Who wins here?? NO ONE! except perhaps the Attorney General that is stirring up the dust to get more votes for reelection. And the cost of defending all these lawsuits; where does all that expense end up?? The policyholders and the stockholders of the insurance companies and agencies. There is no free lunch here, so ultimately higher costs of insurance will be mandated and paid by the policyholders.

    I think Willis’ decision is commendable as far as incentives based on volume alone. If there are underwriting decisions involved in these agreements, then I think they caved and should reconsider. It is the wrong decision and seemingly designed to appease or avert lawsuits rather than do what is right.

  • October 22, 2004 at 1:38 am
    Corkbutt Jones says:
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    Profit based contingencies are fine. They will still be around. It is called capitalism and does not put any client or agency in an unethical position, in fact, it helps.

  • October 22, 2004 at 3:22 am
    Bradley says:
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    The bad in this is bid rigging. Bid rigging municipal business gets you Martha Stuart Living.

    The contingent commisions will not go away as not illegal. If Spitzer thinks they are then I have a new model for the brokers.

    I guess this would be much more ethical(sic) way of transacting business that Spitzer etal would understand.

    Brokers advise all customers they will work on account for 1/3 of the premium and only receive commission if the broker places the account. Broker will only work on your account if they are assured they have an excelent chance of writing the account otherwise will request you pay them $100-$500 per hour for their preparation. Also, you will sign them as exclusive representative and pay a retainer.

    All insurance companies should be represented by their own set of brokers (paid at $100-$500 per hour based upon expertise) to negotiate with customer brokers.

    A much more ethical transaction would occur.

    The cost of insurance would more than double but we could all sleep better knowing the insurance industry is operating ethically by Spitzer standards.



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