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Associations oppose eliminating contingent commissions

The attorneys general of New York, Connecticut and Illinois are continuing their fight against anti-competitive practices in the insurance industry. In doing so, they have been finding fault with contingent commissions paid to insurance brokers and independent agents.

Agent and broker associations are urging companies to fight those allegations on the grounds that contingent commission payments are lawful, competitively driven and do not negatively affect the consumer. The associations criticize regulators seeking to eliminate the practice.

“[Agents’ and brokers’] voices need to be heard,” said Michael D’Arelli, vice president of legislative and regulatory affairs for the Western Insurance Agents Association in Sacramento. “They need to communicate to carriers that it’s not OK to enter into these settlement agreements [with insurance commissioners] and agree to work across the U.S. to abolish contingent compensation.”

“Contingent compensation is not the problem,” D’Arelli emphasized. “The problem is bid rigging and anti-competitive behavior. Contingent compensation is a very lawful practice — it is not illegal — and it is part of the free market system. … We would like carriers to be mindful of how important contingent compensation is to the people writing their business.”

“There is no need to regulate commissions or compensation,” added Robert Hogeboom of Barger & Wolen LLP, counsel to the Alliance of Insurance Agents and Brokers, La Verne, Calif. “The consumer’s primary interest is the price for the insurance and other industries involved with the sale of commodity products do not disclose compensation paid to sales representatives.”

St. Paul Travelers recently reached a $77 million settlement with the Attorneys General, following similar settlements by AIG, Zurich and ACE. Under the terms of the agreement, St. Paul agreed to discontinue paying agent and broker contingent commissions on excess casualty coverage and any line of business if 65 percent of the U.S. market pays no commissions or signs an agreement not to do so. The company also agreed to support legislation and regulations to abolish contingent compensation for insurance products or lines, and support laws and rules requiring greater compensation disclosure.

Boston-based Liberty Mutual Insurance Group, on the other hand, decided instead to fight — not settle — the allegations. The company insisted charges of improper commissions and bid-rigging are untrue and overblown, and noted its willingness to go to court to defend its practices rather than settle.

“We have tried to reach a resolution and can only describe their settlement demands as excessive and unreasonable — both in terms of magnitude and in their demands that we change legitimate business practices in states outside their legal jurisdictions,” Liberty Mutual said in a statement.

Clark Payan, CEO of the Insurance Brokers and Agents of the West, said he sent a letter to Liberty Mutual commending its decision not to settle. “We continue to feel that contingent compensation is a legitimate business practice. It is not illegal or unethical, and it is a valid compensation tool that does not compromise the interest of clients. In that regard, we commend Liberty Mutual’s decision to defend agency incentive compensation,” he said.

“The competitive nature of the insurance marketplace is what motivates and drives placement of insurance,” Payan explained. “To be competitive, you’ve got to place the business outside of what might be a compensation element.”

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.” He noted the settlements directly affect the compensation of agents and brokers who do business with those large insurers. “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.

“This is really a form of extortion,” D’Arelli said. “Regulators are looking to the only avenue they have to make policy now. They are doing it through these settlement agreements because they’ve been beaten like a slow mule in the legislative and regulatory processes across the country.”

In California, the Department of Insurance (CDI) is pushing a new cause of action for steering business to an insurer based on compensation paid to producers as a violation of Section 332 of the California Insurance Code.

According to Hogeboom, “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 and 2005, producer and insurer trade associations contested the California Commissioner’s proposed agent-broker fiduciary regulations. The regulations would have required producers to disclose income received in handling a transaction for a client. It also would have 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 that was heavily criticized by the associations on the premise that producers owe a high standard of fiduciary duties to consumers in insurance transactions. Ultimately, the Commissioner withdrew the regulations on the notion that the industry would self-police.

The associations said that because CDI lacks the authority to impose additional duties on agents, broker and insurers, it is extracting concessions by insurers on contingent commissions that directly affect compensation paid to agents and brokers.

Jensen said, “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.”

“This all stems from Spitzer’s initial investigation of several brokers and companies. There was no question some people were doing things they shouldn’t have. … But methods to deal with that already exist. To throw in contingent commissions and some other things is not the issue,” Payan said. “Incentive compensation is something that has been a legitimate practice and still is a legitimate practice. Anybody can abuse any kind of practice but that does not make it bad.”