Posted on 28 Apr 2010
At the 2010 Risk and Insurance Management Society Annual Conference and Exhibition yesterday, the chief executives of four major insurance brokerage firms disputed criticism that contingent commissions are an inherent conflict of interest because total disclosure eliminates the issue.
The comments made were on the heels of an announcement by brokerage Willis Group Holdings, which announced its "Clients Before Contingents", a multichannel public awareness campaign launched to educate insurance buyers about the conflict-prone practice of accepting contingent commissions (Daily NewsFlash, August 27, 2010).
“I guess I’m the bad guy,” began J. Patrick Gallagher Jr., chairman, president and CEO of Itasca, Ill.-based Arthur J. Gallagher & Co., explaining that when the Illinois attorney general pushed for the firm to accept a ban on contingents, he said he would do so, but only if the attorneys general would get the industry to accept a level playing field and ban all contingents.
Pressure from states to ban the contingent commissions followed a New York State investigation revealing that major brokers took hidden fees to place commercial insurance with carriers involved in a price-fixing scheme.
Mr. Gallagher pointed out that despite their efforts nothing changed, and after repeated discussions with the Illinois attorney general’s office on the issue, they finally relented, leveling the playing field.
However, said Mr. Gallagher, after all the expense for the brokers over the issue, the one good thing coming out of it was one hundred percent transparency.
“I truly believe that, and it is consistent with professional dealings,” he said.
Gregory C. Case, president and chief executive officer for Chicago-based Aon Corp., called the discussion of contingent commissions a “very, very important issue,” but said that ultimately what is important is the value for the price clients get for the services brokers render.
“We live and die on that,” he said.
John L. Lumelleau, president and CEO of Kansas City, Mo.-based Lockton Companies brokerage firm, the only privately held company on the panel, said, “The issue is not contingents; it is behavior.”
His firm was not caught up in the contingent fee ban that the other three faced in 2005 after they were spotlighted by regulatory probes, and he indicated that continuing to receive contingents did not have a negative effect on the company’s business or relationship with customers.
The best approach, he said, is to let customers have a full understanding of payments, and such an approach has not cost the firm any clients.
“It is never a bad idea for clients to know what we earn,” he remarked.
Daniel S. Glaser, chairman and chief executive officer of Marsh Inc., called the debate over contingents a “bit of a red herring.”
“It is not a litmus test of conflict of interest,” said Mr. Glaser, noting that all brokers have some conflict of interest in the compensation that they receive. He said the only way to combat conflicts is through “full transparency and disclosure and open dialogue with the customer.”
He added that it is “overly simplistic that [contingent commissions] be a litmus test of conflict, adding that at Marsh it is ultimately the buyer who decides what the broker’s compensation will be.
In another session later in the day, John J. Lafferty, manager, risk and insurance management for Air Products and Chemicals Inc., and Steven Saporito, managing director, enterprise and risk finance practice for insurance broker Willis, discussed some of the issues risk managers should be examining with their broker in a session titled “The Questions You Should Ask Your Brokers That They Don’t Want To Be Asked.”
On the issue of compensation, Mr. Lafferty said it is important for risk managers to know that the advice the broker is giving is not compensation driven, but driven by the broker’s professionalism and expertise. He said brokers need to prove that the compensation they receive is not coloring the advice they are giving.
He noted, too, that when it comes to expertise, brokers should always have the answers and expertise risk managers need for their risks. If one day the broker comes to them and says they now have the answers the risk manager was looking for, the risk manager should thoroughly question where that expertise came from.
“Any broker worth his salt should not be afraid to be asked questions,” noted Mr. Saporito.
He emphasized that risk managers need to be assured that contingents do not pose a conflict of interest in the advice brokers give, continued Mr. Saporito.
He said he was not accusing anyone who takes contingents of having anything but the best interest of their client at heart, but it is an important question that risk managers need to ask to insure that they are getting the best deal for their risk.