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Distinguishing agents, brokers no easy task

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When the Risk & Insurance Management Society Inc. issued its policy statement in May calling for a prohibition on contingent commissions for accounts where agents and brokers represent buyers, it in effect distinguished brokerage business from agency business based on whose interest is being served.

But such a distinction is not so easily drawn, industry observers say. Most intermediaries, for example, operate in dual roles, meaning they act as representatives of buyers in trying to obtain the best coverage at the best price, but also act as agents for insurers, which, in most cases, pay them a commission and in some cases additional contingent commissions.

There is no standard definition as to what is agency business vs. what is brokerage business within the marketplace, and consultants and intermediaries have varying definitions. Brokers that already follow RIMS' guidelines have differing views (see story page 16).

The distinction, however, has been thrust into the limelight as a result of the contingent commission scandal, with independent agents saying they should not be punished for the sins of some larger brokers that allegedly abused the contingent commissions system.

The world's four largest brokers paid more than $1 billion in client restitution in 2005 to settle allegations that they steered business to insurers that paid the highest contingent commissions. Several insurers also agreed to limit or cease contingent commission payments to agents and brokers as part of separate state settlements made in 2006.

Although the largest brokers stopped collecting contingents as a result of the scandal, the vast majority continues accepting them.

After calling in August 2005 for full disclosure of brokerage compensation regardless of whether risk managers request it, RIMS went a step further in May by calling for a prohibition of contingent commissions within the brokerage sector (BI, June 4).

While RIMS said that it recognizes that these incentive payments 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."

But observers say that defining brokerage and agency business based on whether the client or insurer is represented is not so easy.

"The lines between those two are real fuzzy," said Bobby Reagan, president of Reagan Consulting Inc. in Atlanta. "There's not an agent in the country that doesn't in some case suggest they are working on behalf of the client...and yet are still legally operating as an agent of the insurance company and getting paid a commission."

Mr. Reagan says that the distinction that he sees made most frequently is based on compensation where brokerage business is more fee-based and agency business is more commission-based, he said.

"Where the gray line comes in" is that while an agent really does work on behalf of the client to get the best coverage at the best price, their payment is not coming from the client but from the insurers with whom they have a contractual relationship, said Rob Lieblein, former president and chief executive officer of WFG Capital Advisors L.P., who is now a Harrisburg, Pa.-based managing director of Hales & Co. Inc., which recently acquired WFG.

"If you're truly just brokering business and you're charging your client a fee, then it's clear that the relationship is strictly with your client," he said.

But Timothy Cunningham, a principal with OPTIS Partners L.L.C. in Chicago, said just because a broker receives a fee from a client, "I don't believe that negates their role as an agent" of the insurer. Two of the functional roles an agent plays on behalf of the insurer are the ability to bind coverage within given limitations and the ability to accept premiums, he said.

"That really doesn't have anything to do with advice to clients. It's more about business expediency," he said.

"My view is what difference does it make? If you're an agent or a broker, you have a relationship with your client and you're delivering some element of professional service to that client and there is compensation for that service."

According to Terry Fleming, RIMS' director of external affairs, the difference between agency business and broker business really comes down "to the transparency of the transaction and the understanding with the broker, agent or whoever you're dealing with."

He said, for example, that while he knows his broker has a large agency business, his contract specifies that "they are my broker and are acting on my behalf and I'm paying them for the services they are performing for me."

Mr. Fleming, who is director of the division of risk management for Montgomery County, Md., said his broker is contractually obliged to disclose all payments it receives as a result of placing his business and that if it receives contingent commissions on his account, he is refunded that money.