Posted on 21 Jul 10
Willis Group Holdings, the global insurance broker, stepped up its industry education campaign against contingent commissions this week by distributing a third-party white paper in this week's issue of Business Insurance that highlights in greater detail than ever the conflicts of interest created by the controversial payments. A leading industry trade publication, Business Insurance is read by more than 45,000 risk professionals in North America.
The 16-page report, written by Edwards Angell Palmer & Dodge, a respected international law firm, is part of a broader effort, Clients Before Contingents that Willis launched at the end of April at the annual Risk and Insurance Management Society (RIMS) conference in Boston. The education campaign is centered around a website, www.ClientsBeforeContingents.com, which aims to combat apathy and increase awareness among insurance buyers about the dangers of contingent commissions in the retail brokerage business.
Writing in an introduction to the white paper, Joe Plumeri, Willis Group Chairman and CEO, said, "Willis has long opposed contingents because we believe they are at odds with the obligation retail brokers have to their clients to get them the best terms, conditions and price, and to advocate for them when they have a claim.
"It's important for insurance buyers to know about the conflicts of interest created when insurance companies pay retail brokers bonuses for increasing premium volume and profitability," Plumeri said. "Not only do contingents have the potential to affect the loyalty and service insurance buyers get from their brokers, they also negatively impact the image of our industry."
The white paper, inserted as a special supplement in the July 19, 2010 "Broker Trends and Profiles" issue of Business Insurance, examines in detail how contingent commissions began, how they have grown, how they work, and what the insurance buyer should know about the conflicts of interest they create.
In the white paper, Edwards Angell Palmer & Dodge commented on proposed state compensation disclosure rules, saying, "A regulatory arrangement built around minimum disclosure requirements tends to result in just that: minimum disclosure." The law firm found that in the absence of "compelling" financial or regulatory benefits, there is little incentive for brokers to raise disclosure standards, thereby placing the burden on policyholders to ask more probing and direct questions of their brokers to assess the impact of contingent compensation on their insurance arrangements.
"Unless and until the policyholder believes it has all the information necessary to accurately answer this question," said the law firm, "there is a risk that the trust and confidence relationship both parties to an insurance brokerage arrangement desire cannot exist."
Since a 2010 rule change allowing big brokers to once again accept contingents, some brokers have argued that simply telling clients about the contingents they take eliminates the conflict. However, the white paper concluded this disclosure could be "undermined both by the broad range and scope of contingent compensation arrangements, as well as the inherent difficulty of demonstrating the ways in which a large-volume contingent compensation arrangement can be understood to affect broker behavior with respect to a single placement or claim-reporting transaction."
Don Bailey, Chairman and CEO of Willis North America, dismissed the notion put forth by many brokers that insurance buyers can effectively "opt out" if they don't want their broker to accept contingents. "Contingent commissions are paid annually on a broker's entire book of business, so the cost to the individual buyer can't be known until months after the insurance is purchased," he said. "Even then, the accounting is so opaque that the true cost can't be determined without an extensive forensic examination of the books.
"Willis wants insurance buyers to have the whole story, and by making this information available, it's our hope they will be in a better position to ask the tough questions of their broker," Bailey said.
The paper proposes a simple list of questions that insurance buyers should ask brokers regarding their role in the transaction and the compensation they will receive before authorizing them to make a placement on their behalf:
• What is your role in the insurance transaction and who do you represent?
• What will you be compensated and how will your compensation be calculated?
• What would have been the expected compensation for any alternative quotes presented to you?
Readers of the white paper are invited to call Willis at (212) 915-8644 or write to firstname.lastname@example.org if they have any questions about contingent compensation or Willis' position on this issue. The complete EAP&D white paper is available at www.ClientsBeforeContingents.com or by clicking here.
Willis Group Holdings plc is a leading global insurance broker. Through its subsidiaries, Willis develops and delivers professional insurance, reinsurance, risk management, financial and human resource consulting and actuarial services to corporations, public entities and institutions around the world. Willis has more than 400 offices in nearly 120 countries, with a global team of approximately 17,000 employees serving clients in virtually every part of the world. Additional information on Willis may be found at www.willis.com.