IIABA president: contingency commission crisis threatens agents

For a small to midsized independent insurance agency, contingency commissions can determine whether the business survives, according to many within the industry.

That explains why Alex Soto, a Miami agent who is also president of the Independent Insurance Agents and Brokers of America, was very passionate about preserving contingency commissions when speaking at the Independent Insurance Agents of North Carolina annual conference in Asheville, N.C.

“We have a crisis that threatens each of us in this industry,” Soto said. “It can affect our livelihood and the profitability of every independent insurance agent.”

The practice of accepting commissions over and above those typically built-in to insurance policies has made headlines with multi-year investigations by attorneys general, several high-profile public hearings, various legislative initiatives and class action settlements. Agents are now battling the most recent settlement involving Zurich Insurance that could effectively affect contingencies and mandate disclosure by thousands of agents of all compensation.

Soto and the IIABA contend that illegal practices by certain large brokers to obtain contingency commissions should not be confused with the legal practice of earning and legally accepting the payments.

Red to black
“Half of all agencies in the U.S. depend on the extra amount of income brought in by contingency commissions to move profit and loss records from red to black,” Soto said. “It determines whether we are profitable or not.”

The investigations begun by New York Attorney General Eliot Spitzer in 2004 focused on large brokers that were accused of bid-rigging and false-quoting in order to obtain business and contingencies. Soto said wrongdoings by a few of the “mega houses” that were manipulating the marketplace with selective placement of service agreements triggered a discussion that suggested that contingency commissions are bad in any context.

Soto said he wholeheartedly agrees that the parties should be punished for committing illegal practices to garner contingency commissions, but stresses that earning contingency commissions through ethical means is not a crime. He said small independent insurance agents are being subjected to guilt by association for doing what businesses of all types nationwide do on a common and recurring basis.

Insurance agents regard the commissions from a different perspective than do some outside the industry. Robert Hunter, director of insurance for the Consumer Federation of America (CFA), calls the practice “perverse.”

“Incentives should be eliminated,” Hunter said. “If an independent agent can’t stay in business without contingency commissions, they should get out of the business.”

CFA’s Hunter
Hunter, former Texas insurance commissioner and federal insurance administrator under Presidents Ford and Carter, said there are several large insurers that do not pay contingency commissions to agents or brokers and urges consumers to search them out when shopping for coverage.

In a CFA press release issued in January 2005, Hunter said, “Most insurance agents are honest, but if the compensation system provides an incentive for bad behavior, it is likely to occur.”

But Soto insists that the infusion of legal contingency commissions into small businesses — inherent to retail sales businesses of every kind — allows independent insurance agents to work harder for the consumer. With more capital reserves in an agency’s coffers, more resources can be exploited to provide better service for customers, Soto said. He testified on behalf of the IIABA at the Senate hearing in November 2004.

“We beat back onerous legislation,” Soto told North Carolina agents, referring to a tabling of legislation that would eliminate all contingency commissions across the board. “Fortunately for us, it’s easier to block bad legislation that it is to enact good legislation.”

At the North Carolina conference, Soto echoed the words he offered as testimony during the Senate hearing nearly two years ago:

“Contingency agreements are legal. They reward excellence, as they do in every other promotional transaction in the United States. They are good business practices and they do serve a legitimate purpose. It creates an incentive for the agent to be a good front-line underwriter in the selections of risk and it also ‘incents’ the agent to be a good risk manager in helping the client to put in place measures that will help them reduce their losses. When that occurs, everybody wins. The client wins, because on an ongoing basis, fewer losses will translate into less expensive premiums in the future. The insurance company pays less claims and they share a little bit of that profit if, indeed, the lower losses are there.”