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NEW YORKSupplemental commissions recently introduced by insurers to pay brokers are no different from the contingent commissions they're meant to replace, said Willis Group Holdings Ltd., which will announce today that it will not accept the incentive payments.
The London-based brokerage said it has determined the supplemental compensation plans offered by Warren, N.J.-based Chubb Corp. and St. Paul, Minn.-based Travelers Cos. Inc. do not avoid the conflicts of interest that were associated with contingent commissions, which the world's four largest brokers gave up more than two years ago amid client-steering investigations by then-New York Attorney General Eliot Spitzer and others.
Willis said the new compensation plans have "performance-driven elements that make lump-sum payments contingent on factors such as retention, growth and profitabilityfeatures that rendered contingent commission plans incompatible with conflict-free transparency and our clients' best interests."
"When I look at supplemental compensation, I say to myself, irrespective of what a regulator said you can do, in my opinion, it's the same as a contingent," said Joe Plumeri, Willis' New York-based chairman and chief executive officer, in an interview with Business Insurance.
"Whether it's prospective or retrospective, the fact of the matter is you're getting paid to do something that rewards you for doing more business with a carrier. The rewardÖshould ultimately come from the client," Mr. Plumeri said.
While Willis said it fully expects to be compensated for the work that it does and the value it provides, the new incentive arrangements "are best housed in an agency relationship."
Willis is the first U.S. brokerage to formally announce it will not accept the supplemental arrangements.
The world's four largest brokers agreed to give up more than $1 billion in contingent commissions and pay more than $1 billion in client restitution in 2005 to settle charges that they steered client business to insurers paying the highest contingent commissions. Several insurers also agreed to either abandon or limit the use of contingent commissions.
In December, Chubb and Travelers introduced new supplemental commissions that, unlike contingents that are paid after brokers reach certain volume or profit thresholds, provide brokers fixed compensation based on the broker's prior performance with insurers (BI, Jan. 8).
Although neither Chubb nor Travelers has outlined in detail their commission formulas, saying they are proprietary, state attorneys general have reviewed both programs and determined they fall outside the definition of contingent commissions.
Risk managers, however, have raised some concerns, saying any performance-based compensation arrangements between brokers and insurers present an inherent conflict of interest for risk managers (BI, March 12).
J. Patrick Gallagher, president and CEO of Arthur J. Gallagher & Co., for one, said last month that the Itasca, Ill.-based brokerage has embraced and negotiated supplemental commissions with numerous insurers over the past year and the fully disclosed arrangements have not caused any problems with clients.
"All conflict of interest is waived through disclosure, in my opinion," Mr. Gallagher said.
At that time, both New York-based Marsh Inc. and Chicago-based Aon Corp. said they were still reviewing the structure of the proposed supplemental commissions.