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Issue July 28, 2008 |
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NEW YORK—New York producer compensation hearings concluded last week with state authorities hearing testimony from the Risk & Insurance Management Society Inc. and the world's three largest insurance brokers that have complained of unfair competition as a result of bans on them accepting contingent commissions.
In all, authorities heard testimony from more than 30 interested parties at three separate hearings held in New York state over the past two weeks.
The hearings concluded in Manhattan, where 18 witnesses expressed different views on issues such as contingent commissions, equal treatment, disclosure requirements, and the difference between agents and brokers.
New York Insurance Superintendent Eric Dinallo and New York Attorney General Andrew Cuomo held the hearings to gather information before issuing new regulations that address the compensation system established by their predecessors in 2005 and 2006 settlements with certain brokers and insurers.
Kermitt Brooks, first deputy superintendent of insurance in New York and chair of all three hearings, noted that both state offices may convene small working groups to work on more "narrow issues" and that further hearings may be held before issuing any new regulations.
To settle charges that they steered business to insurers that paid the highest contingent commissions, Marsh & McLennan Cos. Inc., Aon Corp. and Willis Group Holdings Ltd. agreed in 2005 to give up millions of dollars a year in contingent commissions and fully disclose their compensation practices to clients.
New York authorities also reached settlements with several insurers that banned them from paying contingents on certain lines of business. Other brokers, including Arthur J. Gallagher & Co., reached settlements with other state attorneys general that curbed their ability to collect contingent commissions.
Since then, Marsh, Aon and Willis have criticized the current system, saying they are at a competitive disadvantage because the vast majority of the industry continues to collect contingents.
Last week, Janice Ochenkowski, president of New York-based RIMS, testified that contingent commissions and supplemental commissions create an inherent conflict of interest and should be prohibited for all brokers and independent agents that represent buyers.
At minimum, RIMS believes all compensation should be disclosed in writing, she said. "Complete disclosure of all compensation arrangements is not the perfect solution, but it will go a long way towards promoting transparency, re-establishing the trust between the broker and the customer, and providing customers with sufficient information to evaluate any potential conflicts of interest in the placement of insurance policies," Ms. Ochenkowski said in written testimony.
In separate testimony, Dan Glaser, chairman and chief executive officer of Marsh Inc., and Steve McGill, chairman and CEO of Aon Risk Services, said that full transparency is, indeed, in the best interest of clients and should be mandated industrywide.
According to both executives, clients can make more informed choices and evaluate any potential conflicts of interest if they know who their brokers are representing, how they are being compensated and the amount they are being compensated. With full disclosure, marketplace competition will determine what forms of compensation, including contingent commissions, ultimately survive, they said.
Both, however, avoided directly answering whether their brokerages supported lifting their current contingent commission bans.
Mr. Glaser testified that Marsh supported "replacing" its settlement agreement with an industrywide solution that is "fair and consistent" for all producers and addresses the interests of policyholders.
In terms of whether he supported extending its contingent ban or lifting it, Mr. Glaser said only that Marsh is "willing and able to compete" based on any rules that are set.
In his testimony, Mr. McGill said: "Aon's view on contingent commissions is that they should be allowed to continue, but with more detailed disclosure." He said such incentive compensation poses no irreconcilable conflict of interest and does not unavoidably result in steering clients toward less favorable insurers to maximize a producer's revenue.
Despite this, Mr. McGill said he did not want to give the impression that Aon would accept contingents again if it were allowed. He said that contingent commissions were never a material part of Aon's earnings and would not be a priority for the firm going forward.
Don Bailey, CEO of Willis North America Inc., who testified in the first hearing July 14 in Buffalo, N.Y., testified again last week, reiterating that Willis is "absolutely not agnostic" when it comes to contingent commissions. Such incentive payments pose a "clear and obvious conflict of interest" that transparency alone does not resolve, he said. Willis' position is that contingent commissions should be banned from the industry, he said.
When asked whether Willis would accept contingents if its current ban were to be lifted, Mr. Bailey said: "Any compensation directly linked to profit and growth with a carrier, we are against."
Several independent insurance agents who testified at all three hearings said contingent commissions are a legal form of compensation and do not result in any conflicts of interest. Rather, profit-based contingents reinforce the agent's role in educating, supporting and training customers and their employees on appropriate risk control and risk management practices, they said. They also noted that such profit-based arrangements do not influence agents' ability to be a strong claims advocate for the customer in the event of a loss due to the highly competitive marketplace.
The agents stressed the differences between the world's largest brokers and smaller, independent agents and encouraged the panel not to adversely affect independent agents for the wrongs of the megabrokers.
The only reason some of the megabrokers claim there is an unlevel playing field is "because of the consequences of their illegal and dishonest activity," said Neal Sullivan, chairman of the Independent Insurance Agents & Brokers of New York, who testified at the Albany, N.Y., hearing last week. "It is difficult to have any sympathy for the situation they now face, nor is it appropriate to paint the entire insurance community with the same brush."
The IIABNY, as well as other independent agents, said it supports voluntary disclosure upon the request of clients.
In the first testimony given by an insurer that reached a settlement with former regulators, Robert Cusumano, general counsel for ACE Ltd., testified last week that a "simple, clean and practical" solution would provide a fundamental distinction between agents, who represent insurers, and brokers, who represent buyers. He said agents should be allowed to collect contingents and brokers should be prohibited from doing so.
Mr. Cusumano said ACE supports disclosure and every intermediary should be required to distinguish whether they are an agent or a broker in each transaction with clients.
For reprints of this story, please contact Lauren Melesio at 212-210-0707 or email lmelesio@crain.com
