RIMS toughens stance on contingents

Terry Fleming; / RIMS

NEW YORK—The Risk & Insurance Management Society Inc. is taking its strongest stance yet on the issue of broker compensation, calling for a prohibition on all "placement fees" paid to brokers by insurers and for risk managers to be more vocal about managing their vendors.

In its first policy statement on the issue since August 2005, when it called for full disclosure of broker compensation regardless of whether risk managers requested it, the New York-based association said last week that in addition to transparency, "RIMS supports a business model for the insurance industry, which does not provide for, offer or make available contingent commission arrangements for the brokerage industry."

"RIMS is troubled that the insurance industry continues to promote this compensation model despite its many associated issues," it said.

It noted that while it recognizes that contingent commissions are paid on agency-generated business where the agent is representing the insurer, "for brokers and independent agents to accept these fees in transactions that are made on behalf of the buyer, (it) represents an inherent conflict of interest. The recent investigations, admissions and fines demonstrate how these practices can be manipulated to the disadvantage of the insurance buyer," RIMS said.

In 2005, the world's four largest brokers gave up more than $1 billion in contingent commissions and paid more than $1 billion in client restitution to settle charges and concerns that they steered client business to insurers paying the highest contingent commissions.

Several insurers also agreed to cease or limit contingent payments to brokers as part of separate state settlements made in 2006.

While RIMS said it "applauded" those actions, it noted that many smaller, regional or privately held brokerage firms that were not part of the various investigations and settlements continue to accept contingent commissions.

As a replacement to contingent commissions, which are a legal form of compensation, late last year Warren, N.J.-based Chubb Corp. and St. Paul, Minn.-based Travelers Cos. Inc. introduced supplemental commissions. Unlike contingents, which are paid after brokers reach certain volume or profit thresholds, the new insurer payments provide brokers with fixed compensation based on the broker's prior performance with insurers (BI, Jan. 8).

Although RIMS did not specifically address supplemental commissions by name in its policy statement, it did say that it is "disappointed to learn that some brokers are apparently reconsidering their pledge to refuse to accept these fees."

Terry Fleming, RIMS' director of external affairs, said RIMS issued its statement in response to members calling on the association to issue a more updated position.

At the same time, "we want to make sure that our position was out there and strengthened" in light of the recent CEO leadership panel luncheon featured at RIMS' annual conference in New Orleans where Brian Storms, CEO of Marsh Inc., and Greg Case, CEO of Aon Corp., said they were still mulling whether to accept supplemental commissions, which regulators have deemed to be OK, Mr. Fleming said.

While RIMS has yet to see "the mechanics behind" the supplemental commission plans, "we want to make sure that if there's any reward given for placing business then we think it should be prohibited," said Mr. Fleming, who is director of the division of risk management for Montgomery County, Md.

Two other brokers that have sworn off contingent commissions have taken different positions on whether to accept the new supplemental arrangements.

London-based Willis Group Holdings Ltd. says it will not accept them, while Itasca, Ill.-based Arthur J. Gallagher & Co. accepts and fully discloses the supplemental commissions to clients.

In addition to supporting a prohibition on all placement fees for brokers, RIMS also is calling on risk managers to become more vocal about the issue with brokers and insurers.

"Brokers have told risk managers over and over that we have the power to make the change," Mr. Fleming said. "So RIMS is calling on risk managers to evaluate their contracts and if they're not happy about it stand up and make their feelings known."

Ken Breyley, risk manager for OMNOVA Solutions Inc. in Fairlawn, Ohio, for one, said he was "delighted" that RIMS revised its position to support the outright prohibition of contingent and supplemental commissions.

He said he remains "shocked by the fact that many risk managers and insurance buyers are not concerned by the absolute conflict of interest that exists when the intermediary is paid by both the buyer and the seller in an insurance product transaction."

Mr. Breyley added: "Full disclosure and transparency does not eliminate the conflict of interest, it only makes the potential for conflict of interest known to the insurance buyer."

The largest brokerages differed in their response to the RIMS statement.

"It's terrific that as the recognized body representing the risk manager, (RIMS is) calling for a level playing field and, more importantly, one that promotes a value-driven equation for the benefit of the client," a Willis spokesman said.

"Over two years ago, Aon voluntarily decided not to accept contingent commissions and to become fully transparent with its clients," an Aon spokesman said in response. "Therefore, Aon strongly agrees with RIMS that, as a first step and, at a minimum, the many other brokers that still accept such payments and are not transparent with their clients should introduce similar reforms. Once these reforms are in place, then the industry can turn to the more difficult question whether supplemental commissions, which some carriers have begun paying, raise similar issues," he said.

A spokesman for Marsh said: "The issue here is contingent commissions, which is a practice that underwriters and most brokers continue to engage in. MMC abolished that form of compensation in 2004 and we remain committed to the principle that we will not accept any form of compensation that is inconsistent with our clients' interest."

J. Patrick Gallagher Jr., chairman and CEO of Arthur J. Gallagher, was unavailable for comment.