Associations Oppose Eliminating Contingent Commissions

August 16, 2006

The Alliance of Insurance Agents and Brokers has joined the Independent Insurance Agents and Brokers of America (IIAB) and Western Insurance Agents Association (WIAA) in criticizing regulators and public officials who seek the elimination of the payment of contingent commissions to agents and brokers as a condition of settlement of legal and enforcement actions.

The Alliance recently issued the following statement:
As recently reported by the IIAB, Saint Paul Travelers reached a $77 million settlement with Attorneys General in New York, Connecticut and Illinois following similar settlements by AIG, Zurich and ACE. Under the terms of the agreement, Saint Paul Travelers agreed to discontinue paying agents and brokers contingent commissions on excess casualty coverage and paying contingent commissions on any line of business if 65 percent of the U.S. market pays no commissions or signs an agreement not to do so. Further, the insurers agree to support legislation and regulations to abolish contingent compensations for insurance products or lines and support laws and rules requiring greater disclosure of compensation.

Alliance President Gary Jensen said, “Public officials are attempting to end the legally permissible payment of contingent commissions through enforcement actions and lawsuits other than through legislative action.” Jensen notes that the settlements directly affect the compensation of agents and brokers who do business with these large companies. “In effect, the settlements provide incentives for companies to agree to support legislation to abolish contingent commissions along with greater disclosure of compensation because they are at a competitive disadvantage as a result of this settlement,” Jensen said.

Payment of contingent commissions to brokers and agents based on volume, loss ratio, etc., provide incentives for producers to produce business, is competitively driven, and does not negatively affect the consumer. It is no different than one company paying a higher direct commission than another company.

In California, the Department of Insurance (CDI) is pushing a new cause of action of “steering” business to an insurer based on compensation paid to producers. For instance, the CDI has asserted in several recent actions a violation of Section 332 for steering.

According to Robert Hogeboom, counsel to the Alliance, “Section 332 deals with disclosure of facts material to the contract concealment of specific contract terms of a policy. It is a stretch to make a steering claim under this statute. There is no statutory or regulatory authority for direct disclosure of compensation in California.”

In 2004, the Alliance along with other producer and insurer trade associations, contested the Commissioner’s proposed agent-broker fiduciary regulations. The regulations would have required producers to disclose income to be received in handling a transaction for a client and made the failure to inform a client about the best available insurer and steering a client away from that insurer an unfair act or practice in violation of Section 790 of the Code.

The CDI held a hearing on the proposed regulations in January 2005 and was heavily criticized by the Alliance and others in the industry on legal grounds including the premise for the regulations that producers owe the high standard of “fiduciary duties” to consumers in most insurance transactions. Ultimately, the Commissioner withdrew the regulations, issuing a press release that the withdrawal was because the industry had indicated that it would self-police.

In fact, what we are finding is that while the CDI is lacking in authority to impose additional duties on agents and broker and insurers, it is extracting concessions by insurers on contingent commissions that directly affect compensation paid to agents and brokers. Therefore, because the insurers are at a competitive disadvantage to keep up with its competitors in the payment of such compensation, such insurers are committed to applaud and endorse legislation to eliminate it.

Jensen indicated, “Insurers need to hold the line and not cave on these types of settlements, which only induce state Departments of Insurance and Attorneys General to bring more actions.”

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