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Marsh, Aon still mull new insurer payments

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NEW YORK—While large brokers may have a tougher time accepting supplemental commissions from insurers in the wake of Willis Group Holdings Ltd.'s decision to reject the proposed payments, it's unclear whether other brokers will follow Willis' lead, industry observers say.

London-based Willis announced last week that it will not take supplemental compensation of the type proposed in recent months by Chubb Corp. and Travelers Cos. Inc. The supplemental payments are aimed at replacing contingent commissions that the largest brokers stopped accepting--and that some insurers have been forced to stop paying--following state investigations of broker compensation practices.

Although state attorneys general have raised no objections to the Chubb and Travelers payments, Willis concluded that such payments don't avoid the conflicts created by contingent compensation.

"They have performance-driven elements that make lump-sum payments contingent on factors such as retention, growth and profitability--features that rendered contingent commission plans incompatible with conflict-free transparency and our clients' best interests," Willis said in a statement.

Marsh & McLennan Cos. Inc. and Aon Corp. are still reviewing the structure of the Chubb and Travelers plans and have not decided whether to participate, spokesmen for the brokers said. By contrast, Arthur J. Gallagher & Co. has embraced supplemental plans as long as they are fully disclosed to clients, Gallagher President and CEO J. Patrick Gallagher said in March.

Chubb and Travelers have not released details of the commission plans' structure, saying the information is proprietary, but sources familiar with the Chubb plan outlined some elements (see related story).

Whether Willis' decision will prompt its larger competitors to follow suit and reject supplemental commissions remains to be seen.

Brokerage rivals will have a harder time taking the incentive payments because of Willis' move, "especially in a (request for proposal) situation, as Willis will point to this factor to convince clients that they have best-in-class corporate governance practices," noted David Small, an analyst with Bear Stearns in New York in a research note.

"It makes it more difficult for them to come out and say they will" accept the payments, agreed Gregory Dickerson, an analyst who covers Marsh for Fitch Ratings in New York.

Other observers, though, say the major brokers may go their separate ways on the issue.

Soon after the broker compensation controversy erupted in 2004, many predicted that contingent commissions would disappear and the industry would move toward more uniform compensation practices, said Bruce Ballentine, lead broker analyst for Moody's Investors Service in New York.

Instead, those practices diverged, with numerous insurers continuing to pay contingent commissions and several brokers continuing to accept them, he noted.

Referring to the Willis decision, Mr. Ballentine said: "This is a sign that we are farther from common ground, that different companies are going to follow their own paths."

Marsh, Aon and Willis already compete on specialty practices and price, and compensation practices may simply become "one more variation in the marketplace," he observed.

Gretchen Roetzer, a Chicago-based Fitch analyst who covers Aon, said it's hard to predict how--or whether--the Willis decision will influence competitors. The other brokers want to do what's right for their clients and do not want to stand out too much on compensation matters, but also do not want to pass up revenue, she said.

"I don't think any of them would increase the ill will that they have had to get over," she added.

Several observers, meanwhile, noted that Willis earned far less contingent commission revenue than its larger competitors, and that it has less to lose by forgoing supplemental compensation.

Marsh agreed to pay $850 million and Aon $190 million--roughly the equivalent of their 2003 contingent commission revenues--to settle client-steering and other charges brought by state attorneys general. Willis paid $51 million to settle similar charges.

It is not clear whether supplemental commission plans would pay brokers as much as previous contingent agreements did.

Sally Roberts contributed to this story.