The American Insurance Association and the Property Casualty Insurers Association of America have joined independent agents in criticizing a report on the use of contingent commissions in personal lines insurance by the Consumer Federation of America and its insurance director, J. Robert Hunter, as lacking in facts and “wholly without merit.”
The CFA paper, entitled “Contingent Insurance Commissions: Implications for Consumers,” was released yesterday. (See lead story.)
“Mr. Hunter’s absurd statements about the competitive nature of the property-casualty industry lack any factual basis,” said David Snyder, AIA vice president and assistant general counsel. “In truth, the property-casualty marketplace is highly competitive, with thousands of individual insurance companies offering consumers a variety of products. The primary constraints on further competition and consumer choice are government-imposed price and product controls.”
The AIA also believes that the paper casts unfair aspersions on the many thousands of ethical producers and underwriters who constitute the insurance industry. “Mr. Hunter’s illogical leap to the conclusion that producers would delay or deny filing a claim in order to maximize their contingent commissions is wholly without merit,” Snyder stated. “Most personal lines claims are settled within days of their receipt by the insurance company, and most claimants report a high degree of satisfaction with the claiming process.”
Snyder defended contingent commissions based on loss ratios. “It is entirely reasonable for companies to use contingent commissions for agents who bring them low-risk individuals.” He added that “ironically, Mr. Hunter misses the fact that such arrangements do provide a valuable and positive consumer incentive: to become a better risk by avoiding moving violations, buckling up, driving a safer vehicle, installing smoke detectors and deadbolt locks, and taking other steps to reduce the possibility of injury, death, or property damage.”
While it is true that regular commissions and contingent commissions vary by company, this should be expected, given the many business models and types of customers that different insurance companies focus on. “However, even accepting the figure that Hunter cites (that, for the industry as a whole, contingent commissions seem to represent about ten percent of commission income), it is hard to believe that producers would jeopardize their relationships with customers – and thus the remaining 90% of their income – to enhance these contingent commissions by a small amount,” said Snyder.
AIA said it and other insurance organizations encourage all insurance consumers to shop around when purchasing insurance coverage. Consumers should evaluate information about each insurance company’s financial strength and reputation for service, in addition to price, according to the insurer organization.
PCI said the report makes “a quantum leap between the payment of contingent commissions and the steering of business by independent agents to certain insurance companies to the detriment of consumers.”
According to PCI, the following facts that are either overlooked or ignored in the CFA report:
• The CFA report is based on annual financial statements that insurers file with the NAIC. PCI maintains that these financial statements only verify that some insurers pay contingent commissions to their sales forces. “The CFA makes a quantum – not to mention an irresponsible and absolutely unsubstantiated – leap to conclude that the payment of a contingent commission results in the ‘steering’ of business by agents to costlier insurance providers. The fact of the matter is that the CFA conducted no research on buying habits or sales practices to back up its ridiculous allegations,” according to PCI.
• Insurers typically pay contingent commissions to reward sales professionals for the amount of business produced and for the quality or profitability of that business. PCI argeus that this is a significant point because not all insurers use their sales force in the same manner. “Some insurers utilize agents as field underwriters and provide incentives for them to carefully seek out and underwrite the business. Moreover, carefully underwritten business helps reduce premium for those lower risk consumers. The CFA draws the erroneous conclusions that complex insurance products equate with commodities and that agents place business with the highest bidder,” PCI says.
• PCI further maintains that the CFA report ignores “the fact that consumers have greater access to competitive markets than ever before.” PCI said consumers can shop for coverage with a broker, an independent agent, a captive agent, or directly from the company via the Internet or a toll-free phone call and they can compare prices by browsing the Web or making a phone call. “This diversity of purchase options – and the competition it generates – provides consumers greater choices and instills greater transparency in insurance transactions,” PCI maintains.
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