Illinois Allows Retail Contingent Commissions for Arthur J. Gallagher

In a filing of financial results for the second quarter 2009, Itasca, Ill.-based insurance broker Arthur J. Gallagher & Co. reported that amended settlement agreements with the Illinois Attorney General and the Illinois Department of Insurance will allow it to accept “retail contingent commissions across all lines of its brokerage business.”

The settlement agreements, reached in late July, were not welcome news to the Risk and Insurance Management Society (RIMS), which opposes contingent commissions as representing “an inherent conflict of interest.”

In its Q2 financial statement, Gallagher said it anticipates the amendments will result in the generation of an additional $10 million in retail contingent commission revenues on an annualized basis by 2011. The agreements with the Illinois AG and state regulators are effective Oct. 1, 2009.

A previous agreement between the Illinois AG, the insurance department and Gallagher required that, among other things, the broker:

• Create a $27 million fund for certain retail clients. No portion of the fund represents a fine or a penalty.
• Eliminate contingent commissions for retail clients (in October 2004, Gallagher voluntarily announced it would not enter into retail
  contingent commission agreements beginning Jan. 1, 2005).

RIMS released a statement expressing its disappointment with the decision to allow Gallagher to begin accepting contingent commissions. In RIMS’ view, the “investigations, admissions and fines that culminated in the agreement signed by some brokers in 2005” to discontinue the practice of accepting contingent commissions “prove that these practices can be, and were, manipulated to the detriment of the insurance consumer.”

RIMS noted that Illinois has lifted the ban on contingent commissions “without any concurrent proposal by the Illinois Department of Insurance and Attorney General to regulate producer disclosure. RIMS has great reservations about lifting the ban on contingent commissions without strong protections for consumers,” the announcement said.

RIMS urged Arthur J. Gallagher “to continue to use the compensation disclosure requirements that were part of the 2005 agreement.”

The Society said it “remains troubled that the insurance industry promotes compensation practices that can lead to conflicts of interest. The Society hopes for a continued open dialogue between all parties on issues of producer compensation and disclosure.”

Gallagher said revenue for the Q2 reporting period declined in the risk management and brokerage division by 2 percent compared with the same period in 2008.

Sources: RIMS, www.rims.org; Arthur J. Gallagher, www.ajg.com