St. Paul Travelers Agrees to Halt All Contingent Commissions

January 4, 2007

The St. Paul Travelers insurance company has agreed to stop paying “contingent commissions” to brokers and agents, according to Connecticut Attorney General Richard Blumenthal.

In August, St. Paul Travelers, which is based in St. Paul, Minn., settled a bid-rigging investigation for $77 million in a deal with Connecticut, Illinois and New York. The company agreed at that time to pay restitution and penalties and adopt reforms.

In November, the attorneys general for the three states told St. Paul Travelers and three other major insurance companies that they must end special commissions to agents and brokers by Jan. 1 as agreed to in the earlier settlement.

ACE Group Holdings Inc. of Bermuda, American International Group Inc. of New York, Zurich American Insurance Co. Inc. and St. Paul Travelers had agreed to end contingent commissions when companies that don’t pay the commissions sell 65 percent of an insurance line.

In November, the companies were told that the 65 percent “tipping point” was reached in homeowners, personal automobile, boiler and machinery, and financial guaranty insurance. As a result, the four companies must stop paying contingent commissions for these insurance products beginning on Jan. 1, 2007. They have already given them up for excess casualty insurance.

A lawyer for St. Paul Travelers said in a letter to Blumenthal and the attorneys general of Illinois and New York last Friday that it would stop paying contingent commissions on the lines as set forth in the order beginning Jan. 1, 2007.

The company said in its Dec. 29, 2006 letter that it will “go even further by providing a fixed commission option (no contingent commissions) for all agents on all lines and encouraging all of its appointed agents in all lines to accept a fixed commission in lieu of any contingent commissions in 2007.”

The company said it “expects all of its agents will be on a purely fixed commission program by Jan. 1, 2008.”

Blumenthal said St. Paul Travelers is doing “the right thing” by voluntarily agreeing to stop paying contingent commissions. “This decision upholds our longstanding position that insurance carriers do not need to pay contingent compensation to profitably compete in the insurance industry,” he added.

The St. Paul Travelers decision comes about one week after Chubb Corp. came to a similar decision in a separate deal with authorities. Chubb also agreed to discontinue paying contingent commissions on all insurance lines in the U.S. beginning in 2007. The company further vowed to contribute $15 million to a settlement fund as well as an additional $2 million to help defray the costs of the investigation by the attorneys general.

Chubb said it would replace its contingent commissions with a supplemental compensation program that will “reward Chubb’s agents and brokers for superior performance in a manner consistent with evolving marketplace standards and reforms urged by the attorneys general.”

Blumenthal said he believes the contingent fees will eventually disappear as Travelers and other insurers abandon the practice.

“First Chubb Corporation, and now St. Paul Travelers, are setting the stage for an historic change in how the insurance world does business. I expect contingent compensation bans will be contagious in the industry – eventually ending a pay-to-play culture altogether, and restoring consumer trust. As my investigation of the insurance industry continues, I will vigorously pursue that goal.”

State attorneys general have argued that “contingent commissions” paid to brokers and agents to steer business to insurance companies are tantamount to kickbacks that unfairly increase the prices paid by insurance clients.

However, Main Street independent agents have defended contingent pay plans and called the orders banning them unfair when they were sent out in November.

“It is grossly unfair to impose contrived restrictions on the ability to compensate producers in a legal and honest manner,” said National Association of Professional Insurance Agents Executive Vice President and CEO Len Brevik following the November order that the 65 percent “tipping point” had been reached and the insurers must stop paying contingencies.

Brevik said the attorneys general should be prohibited from using their settlement powers to bring about a ban on all contingent compensation.

Independent Insurance Agents & Brokers of America CEO Robert A. Rusbuldt has blasted the settlements, arguing that carriers are now unable to use what is considered a legal way to compensate their sales forces. He maintains that contingent compensation is used in virtually all industries across America.

“The independent agent and broker community is greatly distressed by this development,” Rusbuldt said back in November.

Rusbuldt, Brevik and other critics of the bans have also noted that the illegal activities uncovered by Blumenthal and other attorneys general occurred in commercial lines, not personal lines, yet, the bans will largely affect personal lines.

“The solution imposed on carriers and agents of banning incentive compensation is totally misplaced and directed at business that was never a problem to begin with,” Rusbuldt said.

“This is an example of settlement powers run amok. Our job is to make sure that this judicial madness does not become a model imposed on the entire insurance industry,” Brevik said.

Source: Conn. AG Richard Blumenthal
Also, some Associated Press reporting was used in this story.

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