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Insurers rework broker compensation

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HARTFORD, Conn.—Risk managers' reactions range from cautious to skeptical to the recent announcements by two insurers that they will phase out contingent commission payments to brokers and replace them with supplemental payments that fall outside the definition of contingents.

St. Paul Travelers Cos. Inc. confirmed last week that it will offer its producers the option of a fixed, performance-based supplemental commission in lieu of contingent commissions in all commercial lines this year. The insurer said it expects all of its producers to switch to the supplemental payment option by 2008.

The move follows Chubb Corp.'s decision, announced last month, that it would halt all contingent commission payments from the beginning of this year. Chubb also is replacing contingents with a fixed compensation program based on prior years' performance.

Brokerage industry representatives have praised Chubb's program as a model for future compensation plans that reward broker performance but comply with regulatory restrictions on contingent commissions.

Both the St. Paul Travelers and Chubb programs have been reviewed by state attorneys general and found not to represent contingent compensation as defined in the insurers' settlements of client steering charges, Connecticut Attorney General Richard Blumenthal and a Chubb spokesman confirmed.

While the largest brokers stopped taking contingent commissions in the wake of state investigations into client steering, they are not expected to face any regulatory barrier to accepting the new payments being offered by Chubb and St. Paul Travelers, regulatory and brokerage representatives say.

Representatives of Marsh Inc., Aon Corp., Willis Group Holdings P.L.C. and Arthur J. Gallagher & Co.—all of which stopped accepting contingents—either declined to comment or could not be reached on whether they will accept the new supplemental payments.

Risk managers' reactions varied.

"It's the next logical step in making the entire (insurance placement) transaction transparent," said Michael Liebowitz, director of insurance and risk management for New York University, and current president of the New York-based Risk & Insurance Management Society Inc.

"As long as the buyer understands what dollars are being paid to brokers on their behalf," programs like Chubb's and St. Paul Travelers' may meet the goal of transparency.

"What many of us in risk management have said is the key issue is open communication on what is being done on an account-specific basis," said Janice Ochenkowski, managing director with Jones Lang LaSalle Inc. in Chicago. "Anything that moves us toward openness in transactions is very good."

Others objected on principle to brokers receiving additional compensation from insurers.

"A broker's primary objective is to represent their client, which is the insured," said Ellen Vinck, risk manager for BAE Systems Ship Repair Inc. in San Diego. "I just think that any types of additional compensation that are paid by the insurance companies can muddy the water. That is the slippery slope that we went down."

"I don't think you can walk away from one (form of compensation) and reinvent it in some other form," Ms. Vinck added. "There's really just black and white on this issue; there is no gray."

St. Paul Travelers' decision to phase out contingent commissions came after the insurer was notified in November that it would have to stop paying the commissions in six insurance lines under the terms of its August 2006 settlement with the attorneys general of Connecticut, Illinois and New York.

Under the $77 million settlement, which resolved client steering and other charges, St. Paul Travelers agreed not to pay contingent commissions on any line, product or segment of business if insurers representing 65% of gross premiums written in that line do not pay such commissions or have similar settlement agreements.

The 65% test was a feature of settlements between the states and several other insurers.

Pursuant to the settlement, the three states told St. Paul Travelers that the 65% "tipping point" had been reached in the boiler and machinery and financial guarantee lines, as well as in four personal lines.

In a Dec. 29 letter to Mr. Blumenthal's office, the insurer responded that it would stop paying contingents in those lines. St. Paul Travelers then went on to say that it intends to phase out contingent commissions in all lines by 2008.

The insurer is now offering commercial lines producers two options: They can continue to accept contingent commissions on all lines except those that reached the 65% tipping point; or they can stop all contingent compensation and accept a fixed supplemental commission based on historical performance.

The insurer expects all of the commercial lines producers to opt for the new fixed supplemental payments by Jan. 1, 2008, because the new program makes them "whole, economically," provides a more predictable revenue source and deals with the regulatory issues involving contingents, a St. Paul Travelers spokeswoman said.

The spokeswoman declined to provide any details of how the new fixed payments would be calculated, saying the information is proprietary.

"We believe this program is a thoughtful approach to a complex issue," she said. St. Paul Travelers has already replaced contingent commissions with the fixed supplemental payments on all personal lines business, she said.

The action by St. Paul Travelers followed Chubb's agreement last month to halt contingent commissions as part of its $17 million settlement with New York, Connecticut and Illinois.

Chubb stopped paying contingents as of Jan. 1 and is instead offering fixed incentive compensation based on a producer's historical performance.

Under Chubb's settlement, "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.

The St. Paul Travelers settlement agreement does not contain the same language, but defines contingent compensation as commissions based on the number of policies sold, level of growth in policies or premiums, retention rate or attainment of certain profitability goals.