Contingent phaseout likely to court trouble

NOW THAT ELIOT SPITZER has said four major multiline insurers can no longer pay contingent compensation to agents and brokers in six lines of business, including boiler and machinery, financial guarantee, homeowners and private-passenger auto liability, we wonder what the next phase in this saga will be.

Terms of the settlements that ACE Ltd., American International Group Inc., St. Paul Travelers Cos. and Zurich Financial Services Group reached with Mr. Spitzer and other state attorneys general require the insurers to cease paying contingents in lines where competitors writing 65% or more of the business in such lines do not offer such compensation to producers. As we report on page 1, Mr. Spitzer announced that the "tipping point" has been reached in several lines.

Groups representing agents and brokers are not happy, and we can hardly blame them. Regulation by litigation is no way to govern industry practices. While a handful of individuals did unethical things, most brokers and insurers have committed to disclosure and transparency, and altered their business practices to prevent such acts in the future.

Commendable as Mr. Spitzer's efforts to punish wrongdoers are, we think his aggressive campaign to rid the industry of an incentive payment system that was never illegal is going to hurt a lot of people who did nothing wrong, including insurance buyers.

It's not that we favor volume-based contingent pay; as overwhelming evidence has shown, it clearly creates a conflict of interest among brokers, whose job it is to represent insurance purchasers. But agents are different. They are the appointed representatives of insurers and have a right to be compensated for their efforts. Indeed, contingent income is vital to agents' profitability and ability to stay in business.

Is the inevitable consolidation of distribution channels really going to benefit insurance buyers? Will insurers that shave a few points in their expense ratio because they no longer pay contingents pass those savings on to policyholders? Don't hold your breath waiting for that to happen.