Consumer Group Hits Payment of Contingent Commissions in Personal Insurance as Harmful to Buyers

January 27, 2005

A new report by a national consumer organization claims that contingent fee arrangements “similar” to those being investigated by New York Attorney General Eliot Spitzer in commercial insurance brokerage are “quite common” in the sale of personal lines insurance to individual consumers.

The opinion report from the Consumer Federation of America concludes that commissions given for steering business to particular insurers could lead to higher rates for many consumers and that profit-related commissions “are of even greater concern as they may entice agents or brokers to delay or discourage legitimate claims.”

The CFA report, issued by J. Robert Hunter, CFA’s director of insurance, maintains that contingent commissions tied to placements and profits are most likely found between independent agents and their companies. It says that captive and direct writing insurers do not pay them.

For 2003, total commissions paid to agents and brokers ranged from 0 to 30 percent, according tot the report. Overall commission income for agents was 90 percent regular commissions and 10 percent contingent commissions.

The report states that the five companies among the top-selling insurers that paid the highest contingent commissions are:
Federal Insurance 2.31% of premium
Travelers C&S 2.18% of premium
Zurich American 1.94% of premium
Allstate 1.74% of premium
Hartford Fire 1.67% of premium

The study looked beyond the top 20 insurers in personal lines and found that among the insurers paying contingent commissions in personal lines are Allstate, Auto-Owners, GEICO, California State Auto, Chubb, Hartford, Nationwide, Ohio Casualty, Safeco and Travelers.

The authors of the report recognize the large role played by independent agents in the sale of auto and homeowners insurance but are suspicious that the use of such contingency payments results in higher prices for consumers.

“The complexity of the insurance marketplace and the reliance of many consumers on agents or brokers as a result leaves millions vulnerable to sharp sales tactics and hidden commission arrangements that may entice agents to select the wrong insurers for consumers. Many high-priced policies are sold, even when cheaper alternatives are available,” the report claims.

The report also alleges that independent agents and their companies erroneously claim they represent consumers:

“Many consumers have been misled into thinking that independent agents represent their interests and not those of the insurance company. Insurers and agents aggressively promote this inaccurate perception in their advertising, often not making it clear that the agent actually represent the insurer.”

The report paints two scenarios to show how consumers may be harmed.

Regarding contingencies paid to reward placement or so-called steering, the report says insurers defend this type of payment because it “encourages agents to make sure that consumers take steps to reduce their risks of filing a claim.” But, the report says, that is not how these commissions work in personal lines. “Offering additional compensation to agents who conduct safety assessments of clients’ homes or driver safety courses would be a proper way to encourage upfront loss mitigation. However, by offering additional compensation for lower losses without any evidence of mitigation effort, insurers are encouraging improper forms of loss mitigation, such as dishonest claims procedures designed to delay or eliminate certain legitimate losses.”

Regarding profit-based contingencies, the CFA report claims that agents can maximize profit by placing a consumer with a higher priced insurer with a higher priced commission and that some insurers compete for this business by offering brokers higher commissions, with high rates paid by the consumer.

Referring to Spitzer’s investigation of commercial lines as proof of an “anti-competitive culture” in the commercial insurance industry, CFA suggests that similar problems exist in personal lines. “If the industry is not competitive for sophisticated, knowledgeable commercial clients, it is very likely that it is not competitive at the retail consumer level.”

CFA promised to report in the future of the impact of all commissions — not just contingent — in auto and homeowners insurance to see how affect rates and consumer satisfaction.

A copy of the report can be found at:

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