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IL Insurance Department Allows Gallagher to Accept Contingent Commissions

Posted on 29 Jul 2009

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The fourth-biggest insurance broker, Arthur J. Gallagher & Co., said regulators released the company from commission curbs in a move that may hasten reform for larger rivals Aon Corp. and Marsh & McLennan Cos.

Gallagher won permission from the Illinois Department of Insurance to accept so-called contingent commissions, the once- secret payments that starting in 2004 prompted bid-rigging investigations of the biggest brokers. The new rules, which apply to “retail” contingents, will provide Gallagher $10 million in extra annual revenue from insurers from 2011, the Itasca, Illinois-based company said yesterday in a statement.

Gallagher’s three biggest competitors, including Willis Group Holdings Ltd., are lobbying the regulator in New York as it prepares to revisit similar curbs imposed in 2005 following probes led by Eliot Spitzer, then the state’s attorney general. The top four brokers paid more than $1 billion to retire allegations related to contingents, which vary based on the amount of business a broker places with a particular insurer.

“It sets precedent for them to make their own push,” Kenneth Billingsley, an analyst at Signal Hill Capital Group LLC, said of Aon and Marsh & McLennan. If clients or trade groups don’t publicly complain, “you’re going to see more behind the scenes work to get those companies’ bans lifted as well.”

Peers Rise

Aon, the biggest broker, rose $1.51, or 4 percent, to $39.60 at 11:06 a.m. in New York Stock Exchange composite trading. Marsh & McLennan advanced 63 cents, or 3.2 percent, to $20.23, while Gallagher gained 56 cents, or 2.5 percent, to $23.16.

The restrictions on contingents were never extended to smaller brokers, and acting New York Insurance Superintendent Kermitt Brooks has said he’s seeking to improve fee disclosure by smaller brokers and “level the playing field” that was upended by Spitzer’s investigations. Brooks, who took over for Eric Dinallo this month, also said he would take a fresh look at the restrictions on Aon, Marsh & McLennan and Willis.

“When the Spitzer investigations hit, we ended up in a firestorm of subpoenas and class action suits and arrests,” said J. Patrick Gallagher, chief executive officer of the broker his grandfather, Arthur, founded in 1927. By removing the ban, regulators “recognized that the industry standard of contingent commissions was not going to change and that it was unfair to leave us in a position where we could not collect them,” Gallagher said today on a conference call.

Awards, Vacations

Insurers push their policies by paying fees to the smaller brokers on top of what the middlemen receive from their clients. Carriers also extend awards and vacations to independent agents that meet sales goals.

Willis wants the smaller brokers to face curbs as well, while New York-based Marsh & McLennan, the world’s second- largest broker, has lobbied for a repeal. London-based Willis’s share of the restitution was $50 million, while Marsh & McLennan agreed to pay $850 million.

“The regulatory pendulum is clearly shifting back in favor of the large insurance brokers,” Keith Walsh, an analyst with Citigroup Inc., said yesterday in a note to investors. “In contrast to other financial services players, insurance brokers have been poster children for good corporate behavior.”

David Prosperi, a spokesman for Chicago-based Aon, declined to comment. Michael McRaith, the Illinois insurance director, didn’t return a call seeking comment. Linda Collins a spokeswoman for Gallagher, declined to elaborate on the company’s statement.

Daniel Glaser, CEO of Marsh & McLennan’s Marsh Inc. brokerage, said in an e-mailed statement that the restriction on the top brokers should be replaced by rules that apply to all middlemen.