Since October 2004, contingent commissions have been stirring up debate in the insurance and employee benefits arena thanks to Eliot Spitzer's take-no-prisoners approach. With the confluence of political melodrama mixed with a series of indictments and industry backlash, confusion abounds over what has really happened and in what direction the industry is heading.
Contingent commissions, or overrides, have been around since the 1960s when brokers began receiving them to make up for lost revenue from claims that were rising faster than the rate of inflation. Carriers offered brokers 5 percent to 10 percent of the premium if the agent met certain profitability goals. In the 1970s and 1980s, little had changed; insurance brokers were receiving money from both sides of the transaction and everyone seemed happy -- everyone except the customer.
Regulatory oversight remained minimal mainly because fees were being paid in one lot for numerous clients and it was difficult to keep track. But customers grew wary and public scrutiny rose over whether brokers were serving the best interest of the client or the carrier.
According to Insurance Journal, four decades later contingent commissions make up 12 percent of annual gross revenues among 100 of the biggest insurance brokers in the country. This made New York Attorney General Eliot Spitzer very unhappy, and in 2004 America's most consequential political figure began passing out indictments left and right.
Marsh, Willis and Aon, the top three brokers in the nation, received a swift spank on the butt from the regulator of all regulators and stopped taking overrides early last year after allegations of widespread fraud and antitrust violations threatened their credibility.
In 2004, overrides accounted for $845 million in revenue for Marsh, $160 million for Willis and $117 million for Aon -- "kickbacks" Spitzer called them. He claimed that, in 2002, Marsh and Aon comprised 54 percent of the global brokerage market and Willis chipped in an additional 7 percent.
In his testimony before the U.S. Senate in November 2004, Spitzer expressed his concern with this sort of market domination.
"With so much market power concentrated in two or three brokerage firms, the threat of collusion has become a reality," he insisted.
But it wasn't just the power he was concerned with, it was the "lack of transparency" and the "inadequate disclosure and regulatory oversight" in the insurance industry.
Spitzer says his office found that "a small group of brokers and insurance companies essentially control the market, having created a network of interlocking connections and secret payments, which ensure that the bulk of business goes to certain insurers and that profits remain high. The bottom line is that the consumer pays more for coverage."
This is where Spitzer's critics fault him. Opponents complain his aim was at a select few brokers in the top echelons of the market, but resulted in public speculation industry-wide. In other words, individual brokers' names became mud. The National Association of Professional Insurance Agents attests that any unethical activities Spitzer was investigating were conducted by a small group of individuals rather than the entire insurance sector.
In PIA's position paper regarding compensation disclosure, the organization emphasizes its point. "Investigations conducted by individual state insurance departments following the Spitzer investigations failed to uncover evidence of wrongdoing by the vast majority of the insurance producer community. Independent insurance agencies in particular were found to be without fault. As only a few 'mega-brokers' were found to have rigged bids, this should be viewed as an isolated incident restricted to those few producers that control such a large portion of the market that they have, in fact, the power to rig bids. This is not an industry-wide concern and does not merit industry-wide penalties and burdensome legislation."
Superintendent of New York Insurance Howard Mills, however, says that there's a big difference between bid rigging and contingent commissions that is not to be confused.
In his speech before the Professional Insurance Agents of New York State, which has since become a landmark and controversial appearance, he made it clear that contingent commissions and bid rigging are two separate issues. While bid rigging is illegal, contingent commissions are, in fact, legal and have a proper place.
"This whole issue of contingent commissions has erupted and really thrown the industry in turmoil," said Mills. "And let me say first off, that I do believe that a very good, very important, very critical industry was painted with a very, very broad brush. That's unfortunate and it was not fair."
In response to the investigations, many brokers swore off contingent commissions and speculators suspected that prices for employers would decline. But for now it's still too soon to tell. There are a variety of factors that can impact premiums, making it difficult to determine how much or to what extent contingent commissions affect them.
As Spitzer's investigative endeavors take shape in various state departments of insurance around the country, causing company executives to keep a constant watch over their shoulders, it is clear that reform is inevitable. How it will happen nationwide is still up in the air.
One thing is for sure: The industry needs agreement. PIA says that if policy is born as a result of the investigations, it's imperative that the competitive marketplace is not affected, but agrees that a regulatory response is needed to mend defects in the market that affect consumers.
Mills, who referred to independent agents as the backbone of the insurance industry, thinks a common-sense approach is needed.
"Our objective is to give the typical insurance consumer the information they need to ensure that [agents] are acting in their best interest. Period," Mills said.
Then there's Joe Foley, senior vice president of market development for UnumProvident Corp., who is happy to eliminate contingent commissions if there is industry-wide agreement.
"It's hard to change in isolation," Foley said. "There's no clear consensus within the whole distribution channel. Some brokers want to do it one way and others want to do it another, and it's difficult for a carrier to have multiple approaches to distribution and compensation. We would rather have it all one way or the other."
For now, no overriding policy has been passed that could dictate the future of contingent commissions; however, policy reform is not out of the question. At the moment, change is in the hands of the individual brokers and carriers, some rejecting overrides altogether and others formulating stringent disclosure rules.
As for the future, we'll keep you posted.
From the February 2006 issue of Benefits Selling Magazine • Subscribe!
