Marsh Joins Aon, Willis in Rejecting Contingent Commission Income

By | March 25, 2010

Giant insurance broker Marsh says its main brokerage unit will not accept contingent commissions on business for U.S. or Canadian clients but its Marsh & McLennan Agency and its affinity and personal lines business units will.

The decision to not accept contingent commissions in its core brokerage operations aligns Marsh with its two biggest competitors, Aon and Willis, which have also said they will not accept them, although each is using different language. Willis has abolished them, Marsh has rejected them and Aon has said it has no current plans to accept them.

The three largest brokerages had been banned from accepting contingent commissions since January, 2005 but last month officials in New York, Illinois and Connecticut lifted that ban. The state officials said the time had come to level the playing field for all brokers regardless of size. The 2005 ban created a two-tiered system under which the largest brokers could not take contingent income, while middle market and smaller brokers and agencies could. Big brokers had argued that the rules should be universally applied.

The lifting of the ban raised the possibility the big three firms would return to the practice that drew considerable criticism from regulators and risk managers.

“Marsh will not accept contingent commissions on any placements for any U.S. clients served by the firm’s core broking operations. The firm will continue to provide detailed transactional disclosure to clients in its core brokerage operations, including all quotes received and compensation information,” the firm said in its announcement.

“Serving our clients is our top priority,” said Joseph M. McSweeny, president, U.S. & Canada Division of Marsh. “We will continue to distinguish ourselves through our teamwork, service, innovation and global reach.”

Willis stopped accepting contingent commissions in 2004 and has built its reputation in the market in part on this stance. According to CEO Joseph Plumeri, Willis’ policy isn’t going to change.

“We actually took a big step forward to building trust with our clients when contingent commissions were banned for the largest brokers in 2005,” Plumeri said at a recent meeting in London. “At Willis, we’ve abolished them, and we’re not going back. We’re a better company for it.”

Aon last month said it had “no current plans” to go back to the days of contingent income and stuck by that language after Marsh announced its policy.

“We have no current plans to begin accepting contingent commissions. We stopped taking them in 2005 and since then, we have recalibrated our business to focus on risk management and human capital consulting, which has led to increased client retention, new client wins, growth in revenue and market share, and the attraction of new talent to our global team,” spokesman David Prosperi told Insurance Journal.

The industry’s fourth-largest broker, Arthur J. Gallagher & Co. resumed taking contingent income last October, thanks to a revised agreement with Illinois regulators. Gallagher said then that it anticipated generating about $10 million a year by 2011 from contingent commissions.

The states’ decision to lift the ban came in conjunction with the issuance by the New York insurance department of a new regulation requiring all producers regardless of size to disclose their compensation to customers when asked. Aon, Marsh and Willis have all agreed to honor the disclosure standards in this New York regulation.

Contingent income includes insurer payments to brokers that reward volume, retention or profitability of business placed with the carrier. Critics, including risk managers, contend such pay plans can create a conflict of interest — that they may encourage brokers to place business with a carrier in order to qualify for extra income rather than with a carrier that is the best for the client.

Marsh is taking a “client by client” approach on contingent income on business outside of the U.S. and Canada, according to Dan Prince, global marketing director for Marsh.

The mega-brokers’ statements against contingent income don’t impress everyone.

“Marsh or Willis or Aon saying they are not going to contingent income really, to us, is an empty statement. They are all large enough that they will demand the income on the front end, instead. They are not giving up revenue; they are shifting it from the back end to the front end,” Richard Poppa, told Insurance Journal. Poppa is president and CEO of the Independent Insurance Agents and Brokers of New York, which represents large, middle market and small independent insurance agencies.

The decision by the top three brokerages to decline contingent commissions should, however, please their customers. The Risk and Insurance Management Society, Inc. has balked at states permitting contingent commissions again. RIMS has also criticized the New York disclosure rules as too weak.

While Marsh’s core brokerage unit will refrain from accepting contingent commissions, its fast-growing middle market retail agency operation — Marsh & McLennan Agency– and its affinity and personal lines units will accept them. Middle market agencies were never banned from accepting them. Marsh said these segments will provide plain language disclosure that “meets or exceeds” New York’s regulation.

Marsh also said it will continue to collect “enhanced commissions and fees” for services from insurers with respect to its core broking operations. These forms of compensation, which are paid for Marsh’s provision of specific services to insurers, are fixed in advance of insurance transactions and are not related to volume, retention, growth or profitability.

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