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WARREN, N.J.Chubb Corp. last week became the first property/casualty insurer to agree to eliminate all contingent commissions on U.S. business as part of an agreement to settle state officials' probes into its compensation practices.
The Warren, N.J.-based insurer said that, starting Jan. 1, 2007, it would cease paying contingent commissions on all such lines and in their place institute a "supplemental compensation program" for its producers, a move that some observers say could serve as a model for other insurers' future pay programs.
Chubb also agreed to pay $15 million in policyholder restitution to resolve the investigations by attorneys general in New York, Illinois and Connecticut. Chubb, which was not assessed any fines or penalties or required to apologize to its customers, also will pay $2 million to the states for the cost of the investigations, which were led by New York Attorney General Eliot Spitzer.
Mr. Spitzer's office said in a statement that the settlement resolves an investigation of "customer steering, improper finite reinsurance transactions, and other unlawful industry practices."
His investigation determined that "Chubb made undisclosed payments to insurance brokers and agents that encouraged them to steer business to Chubb," which created a conflict of interest for brokers and agents "who owed their clients fiduciary duties of care, full disclosure and loyalty."
While the attorneys general did not charge that Chubb participated in a pattern or practice of illegal bid rigging, the investigations did find that the insurer "benefited from and on a number of occasions acted consistently with the objectives articulated by participants in a Marsh-led scheme to rig the excess casualty insurance bidding process," according to the assurance of discontinuance Chubb signed as part of the settlement.
New York-based broker Marsh & McLennan Cos. Inc. last year agreed to pay $850 million and to change its business practices to settle fraud and bid-rigging charges leveled by Mr. Spitzer.
Acknowledging that it appears that it "unknowingly benefited from the bid-rigging activities of others in the excess casualty market, which may have provided Chubb with an advantage in retaining certain renewal business," Chubb agreed to pay $15 million to its excess casualty policyholders who purchased their policies through Marsh between Jan. 1, 2000, and Sept. 30, 2004.
No more contingents
While other recent settlements various insurers have reached with Mr. Spitzer and other attorneys general included provisions that curtail the insurers' ability to pay contingents, Chubb is the first insurer to agree to eliminate them entirely as part of a settlement.
Chubb historically has been among the highest payers of contingent commissions in the industry, according to the attorneys general. From 1999 to 2004, Chubb paid nearly $850 million in contingent commissions, with nearly $100 million going to Marsh alone between 1999 and 2002, according to the settlement agreement.
ACE Ltd., American International Group Inc., St. Paul Travelers Cos. Inc. and Zurich American Insurance Co. Inc., for instance, agreed as part of settlements to cease paying contingents on excess casualty coverage and on any line, product or segment of business if insurers that represent 65% of the gross written premiums on that lineincluding direct writerswere not paying such commissions or were to reach similar agreements. Those additional lines currently are homeowners multiperil, private passenger automobile physical damage, private passenger auto no-fault, private passenger auto liability, boiler and machinery, and financial guarantee (BI, Dec. 4).
ACE and AIG voluntarily ceased paying contingents in 2004 in the wake of Mr. Spitzer's suit against MMC, but historically never paid out significant amounts of contingent commissions.
A person in Mr. Spitzer's office familiar with the Chubb settlement said that the insurer came to the attorney general voluntarily and offered to cease paying contingent commissions on all insurance lines in the Untied States beginning in 2007 and, in return, asked for more lenient settlement terms.
"I think we were more than willing to accommodate that to what ever degree we could," the person said. "That's why you're not seeing spectacular (settlement) numbers here." Other insurers allegedly implicated in the Marsh bid-rigging scheme have paid higher amounts (see chart).
New pay model
In its statement, Chubb said the insurer has voluntarily undertaken substantial business reforms over the past two years, culminating in its new producer compensation model.
While Chubb's statement did not provide many details about its new "supplemental compensation program," and a spokesman declined to elaborate, the insurer did note that it plans to "institute a program of predetermined supplemental compensation for our producers that will both compensate them for their contributions to Chubb's success and facilitate their communication with customers."
According to the settlement agreement, "a fixed commission paid to a producer, set prior to the sale of a particular insurance product, and that may be based on, among other things, the prior year's performance of the producer" is not considered contingent compensation and thus is permitted.
Because the fixed incentive compensation is retrospective or based on prior years' performance, steering concerns are eliminated, sources say. Contingent commission programs are more prospective in that they are contingent on meeting future volume- or profit-based targets and therefore have the appearance of creating a conflict of interest.
"I don't see any conflicts of interest or steering issues because it's retrospective instead of prospective," said Robert A. Rusbuldt, chief executive officer of the Alexandria, Va.-based Independent Insurance Agents & Brokers of America Inc.
While Mr. Rusbuldt said he opposes Mr. Spitzer intervening in compensation matters, Chubb's agreement on compensation practices is encouraging for agents and brokers, he said.
"In general, some companies have been very encouraging and very positive about what will take the place of contingency compensation and in fact we're encouraged that the Chubb plan in many respects will be better than contingency compensation," said Mr. Rusbuldt.
For example, because the incentive compensation is fixed, producers can more accurately budget for expected income, Mr. Rusbuldt said.
"So for the first time, this incentive compensation, which is retrospective and not prospective, can be budgeted for and will help agencies in their business planning in ways that contingencies were not useful," he said.
"We are grateful that Chubb has placed great emphasis on the issue of compensating agents and brokers on the basis of the value they provide in a transparent environment," Ken A. Crerar, president of the Council of Insurance Agents & Brokers in Washington, said in an e-mail.
"Throughout the past two years, we have been deeply concerned that changes in compensation at legal gunpoint might ultimately devalue the broker to the great detriment of insurance consumers," he said. "Like other carriers that have put the Spitzer investigations behind them, Chubb's changes appear to be very sensitive to those concerns," Mr. Crerar said.
In addition to Chubb, St. Paul Travelers also has given some indication to its agency force as to how it intends to compensate them going forward. St Paul Travelers, whose settlement provisions contain the 65% rule, plans to continue to pay contingents on commercial lines where they are allowed, but will pay a new supplemental commission for personal lines, according to a December memo to its agency force.
"Given our size and financial strength, we can create a completely fixed program that differentiates for your business performance, allows you to run your businesses effectively, and does not jeopardize your profitability," St. Paul Travelers said in the memo.
A spokesperson for St. Paul Travelers declined to comment further about the plan except to say: "We remain committed in providing our agents with attractive overall compensation opportunity and will continue to offer a competitive compensation program."
IIABA's Mr. Rusbuldt for one thinks Chubb's and St. Paul Travelers' supplemental compensation program will become a model for the future.
"We know there are other companies out there that are in settlement discussions. I believe now with Chubb and Travelers having traveled this route and coming up with very similar proposals on to how to fill in the contingency hole for their distribution force, it would be my guess that both the AGs and the companies involved would look to this as a template," he said.