Risk managers reacted strongly to the news last week that New York and other state legal and regulatory authorities had lifted the 5-year-old contingent commission ban on the world's three largest brokers.

The Risk & Insurance Management Society Inc., for one, said it was “dismayed” at the decision, which came on the heels of New York's new producer compensation disclosure regulation that does “not afford consumers appropriate protections,” RIMS said.

In 2005, Marsh & McLennan Cos. Inc., Aon Corp., Willis Group Holdings and Arthur J. Gallagher & Co. collectively paid more than $1 billion in client restitution and agreed to cease collecting the incentives to settle allegations that they steered business to insurers that paid the highest contingent commissions.

In July 2009, Illinois' attorney general and insurance director amended Arthur J. Gallagher's settlement agreement, allowing the Itasca, Ill.-based broker to once again accept contingent commissions.

Last week's decision to also lift the ban on Marsh, Aon and Willis reflects the desire to help consumers by providing a level playing field for insurance agents and brokers, on which they can easily be compared, the attorneys general of New York, Illinois and Connecticut and the insurance departments of Illinois and New York said.

According to RIMS, though, “the investigations, admissions and fines that led to the 2005 agreements banning such commissions prove that these practices can be, and were, manipulated at the expense of the insurance consumer. Without strong consumer protections in place, RIMS has strong reservations about a policy that permits contingent commissions again, and this development illustrates why RIMS so vigorously fought for a strong rule.”

On Feb. 10, the NYSID issued its final producer compensation disclosure rule, which takes effect on Jan. 1, 2011, and differs greatly from its original draft that would have mandated disclosure of compensation. Under the final regulation, producers operating in New York must, among other requirements, disclose to clients their role in the insurance transaction and whether they will receive compensation from an insurer based on the sale. Further information about the nature, amount and source of that compensation must be disclosed to clients upon request.

Scott Clark, director of RIMS' external affairs committee, noted in the statement that after Arthur J. Gallagher was given the green light to resume collecting contingents, RIMS expected that New York and other states would follow suit with the other brokers. The New York-based society had hoped, however, that in the absence of a contingent ban, New York would adopt a mandatory compensation disclosure rule, Mr. Clark said.

“Unfortunately, the final regulation does not live up to that standard, and instead the burden to request full disclosure has been placed squarely on the consumer,” said Mr. Clark, who also is risk and benefits officer for Miami-Dade County Public Schools.

Other risk managers echoed RIMS' disappointment.

“I don't think it's right,” said Bill Milaschewski, director of risk management for Boston-based global specialty chemical and materials manufacturer Cabot Corp. “I think that the duty of the regulator is to protect the public, and a broker...is an agent of the consumer, and to protect the consumer, I think it is appropriate that there is a ban...on contingent commissions.”

Mr. Milaschewski noted that this is especially the case with smaller, middle-market companies that may not have risk managers to ensure full disclosure by their brokers.

David S. Hershey, Portsmouth, N.H.-based risk manager for Sprague Energy Corp. and its holding company Lexa International Corp., also takes exception to New York regulators' actions.

“In this day and age where everybody is talking about increased regulation on Wall Street, here we have one of the biggest insurance violators (American International Group Inc.) in the state of New York, and the very regulatory body that would be responsible for full disclosure regulation and consumer protection (is) flip-flopping” on the issue of contingent commissions and mandatory producer compensation disclosure regulation, he said.

“If they can't side with the consumer in this day and age on the doorstep of the taxpayer's involuntary bailout of AIG, what needs to happen? I just don't understand that,” Mr. Hershey said.

Brad Wood, senior vp-risk management for Marriott International Inc. in Bethesda, Md., said that regardless of lifting the ban on contingents, “one would hope that all brokerage firms would swiftly come out and publicly reassure policyholders that they will not accept contingent commissions. Risk managers don't want to go back to the past, questioning whether their brokers' incentives are cross-purpose with policyholders' interests.”

Other risk managers say the focus now should be on transparency.

“I understand why (New York authorities) ruled the way they did. There's a perception out there by these brokers that there was an unlevel playing field—that's debatable, but that was their perception,” said Raymond J. Alletto, vp-risk management for United Rentals Inc. in Irving, Texas.

“The important thing to remember, I think...is transparency and full disclosure are still key requirements,” he said. “Risk managers really need to be very clear, unambiguous and direct with their brokers in setting their expectations for compensation.”

Jessica Maldonado, director of enterprise risk management at Centerline Capital Group in New York, said she believes “there should be a level playing field for agents and brokers” and “that brokers provide value to the insurers and should be compensated in return.”

However, brokers need to be “transparent in identifying revenue derived from contingent commissions” and they need to come up with “an appropriate formula for determining contingent commissions that ensures there will be no conflicts of interest and that the clients' best interest remains at the forefront,” Ms. Maldonado said.

In its statement, RIMS urged Aon, Marsh and Willis to commit to full compensation disclosure “above and beyond” NYSID's regulation. “Such action would go a long way toward building trust and strengthening the relationship between broker and purchaser,” it said.