Executives from Willis Group Holdings P.L.C. and Arthur J. Gallagher & Co. squared off over the issue of contingent commissions during a Hot Topic session Tuesday at the Risk & Insurance Management Society Inc.’s annual conference.

In addition to addressing the positions each firm has taken with respect to accepting contingents, Donald Bailey, CEO of Willis North America, and James S. Gault, president and CEO of Gallagher’s brokerage services division, also scrutinized each other’s stance on clients’ ability to opt out of contingent arrangements and client apathy toward the issue.

During the question-and-answer session, Mr. Gault was asked to explain Gallagher’s “opt-out” strategy when it comes to contingents.

“It’s a very simple concept,” Mr. Gault said. After Gallagher discloses all of its revenue sources to clients, if a client chooses not to participate in the broker’s contingent or supplemental arrangement with insurers, that client’s premiums and loss histories are removed from the calculation, he explained.

“At Gallagher we believe in client choice,” he said.

However, Mr. Bailey said that while risk managers may “take comfort” in the idea of being excluded from a broker’s contingent calculation, those insurance buyers are still paying for the contingents through higher premiums.

Mr. Bailey said looking back at 2005 settlement agreements, a number of brokers, including Willis, were required to return contingents to clients in the form of client restitution.

“All of us who were forced/asked to do that will tell you that the math associated with figuring out what company, what premium and what loss scenario required what type of return payment…it was a crazy, complicated, incredibly inexact science,” he said. “I don’t know how you segregate a single company’s premiums and loss history from a portfolio that sometimes is hundreds of millions of dollars of premiums.”

So while risk managers may “take comfort” in opting out of a contingent arrangement, “the fact of the matter is, your premiums are going to be inflated because the entire group is not going to opt out so you’ll be paying higher premiums anyway,” Mr. Bailey said.

When it comes to risk manager apathy toward the issue of contingent commissions, Mr. Bailey said he boils the indifference down to two issues: compensation being an uncomfortable topic and the lack of education and ignorance on the topic.

“People truly don’t understand the inner workings of a brokerage firm in the context of supplementals, and in the context of contingents and the emerging context of enhanced commissions,” Mr. Bailey said. “When I see a risk manager who thoroughly understands the issue I’m much more comfortable based upon what they do. All too often though, the norm is…when you engage people on this topic…there’s a lot of gaps in understanding how these things work.”

Mr. Gault disagreed.

“I don’t think there’s a risk manager here who isn’t aware…of how they work. I think the risk management community is pretty well educated on the topic,” he said.