Drawing a Line in the Sand

Who do you really work for? That’s a question all insurance buyers should ask of their brokers.

Most insurance buyers assume their broker works for them. They hire a broker to get them the best coverage at the best price; when a claim is filed, they expect their broker to be their advocate and fight for them to achieve the best outcome with the insurance carrier.

That’s the expectation. But the reality could be different. How a broker gets paid may show where its loyalties lie.

Brokers are typically paid a commission based on a percentage of the premiums the client pays to the insurance carrier. That compensation works best when it’s upfront and completely transparent to the client.

The problem is, thousands of brokers — and if you are a risk manager, yours may be one of them — also accept year-end bonuses from insurance companies that are contingent on premium volume and profitability. These backdoor payments, known as contingent commissions, are paid on the broker’s entire book of business with the carrier. If premium volume for the year has gone up, a special bonus is often paid. If profitability is higher — that is, the level of claim payouts is lower — the broker can also be rewarded.

Who, indeed, is the broker working for when it accepts contingent commissions? Given the potential conflicts, it might not be the client alone.

SERVING ONE MASTER

Brokers should only serve one master. It’s either the carrier or the client. They shouldn’t work for both. You wouldn’t hire a law firm if your attorney had a financial stake in the other side of a case.

Willis has long opposed contingents because we believe they are at odds with the fundamental obligation that retail brokers have to advocate for their clients when they have a claim, and to secure for clients the product with the best terms, conditions and price. For us, it’s clients before contingents every time.

When a broker accepts a contingent commission from a carrier, it has a certain incentive to place its client’s business with that carrier, rather than consider the full range of options for the client. If the broker takes a profitability contingent, it may not pursue a client’s claim with the same vigor and tenacity that it should. And if a pending claim happens to get bogged down until the next year, it only serves to help the calculation for this year’s profitability bonus.

The conflicts of interest should be obvious.

Those conflicts were widely exposed in 2004 with an investigation by state attorneys general and insurance regulators in the United States that resulted in a ban on contingents for the four largest brokers in 2005.The situation is different in Canada, where contingent commissions are an accepted practice in the insurance industry. Just because that’s the way business has been done doesn’t make it right.

U.S. BAN ON CONTINGENT COMMISSIONS

The ban in the United States imposed on the four brokers still left thousands of other brokers free to take contingents. It also created an unlevel playing field. Brokers who accept contingents could offer lower up-front commissions, knowing they could make it up on the back end with bonus payments from carriers that probably wouldn’t be noticed or questioned.

Even before the ban, Willis put a stake in the ground by voluntarily refusing to accept contingent commissions in its retail brokerage business — the only broker to do so.

A rule change announced earlier this year has allowed the big brokers to once again accept contingents. As a result, contingents have made a comeback in the United States

Willis, for one, will remain steadfast in its opposition to contingents. We have planted our flag firmly on the side of our clients. And that means not taking incentives from insurance companies that would put us in direct conflict with our clients’ best interests.

Other brokers are less than clear on this point. Marsh said it would refuse contingents, but a closer examination shows that prohibition applying to only a small portion of its brokerage business. Aon, for its part, said it would resume accepting commissions “where appropriate and legally permissible.” The fourth-largest broker, Gallagher, came out early and said it was going back to its old ways and would accept contingents after Illinois regulators gave it the green light last year.

These positions fly in the face of what clients say they want from their brokers. In a recent poll of commercial insurance buyers, more than 70% said contingent commissions represent a conflict of interest.

Our stance against contingents has helped us retain clients and win new ones who share our view and want their broker to operate in a contingent-free zone.

Some brokers argue that simply telling clients about the contingents they take eliminates the conflict. But no amount of disclosure will change this fact: when brokers accept contingents, they are given an incentive to work in the interests of the carrier.

Others are quick to point out that clients can “opt out” if they don’t want their broker to accept contingents. But it’s not that simple.

Since contingents are paid annually on a broker’s entire book of business, the cost to the individual buyer can’t be known until months after the insurance is purchased. Even then, the accounting is so opaque that the true cost can’t be determined without an extensive forensic examination of the books.

BACKGROUND

A topic of debate since 2004, contingents have been around for a long time before that. They started when insurance was predominantly a local business: carriers sold policies through their own locally based salaried employees –the first insurance agents. Over time, a new business model emerged in which agents took appointments from multiple insurers — the so-called independent agents.

This system worked well for insurance companies because it allowed them to trim their salaried sales force and shutter local offices. But it led to a new problem: how to encourage these independents to sell policies with equal gusto as their captive or salaried agents. That led to the rise of new forms of incentive compensation, including contingent commissions.

As carriers relied increasingly on independent distribution, they widened the incentive programs to include producers of all kinds — including brokers who were supposed to be working for the insurance buyer.

This is where agents and brokers differ. Whereas brokers should act purely on behalf of their clients, agents are legally bound to represent the carrier. Willis has some businesses in which it acts as an agent for the insurer for specific products and programs. These relationships are fully disclosed to the insureds and are separate from our core retail brokerage business.

When Willis acquired Hilb Rogal & Hobbs in 2008, we inherited HRH’s contingent program with the understanding that we would phase it out over three years. Rather than take these incentives for 36 months and protect HRH’s legacy contingent arrangements, we moved quickly to convert to upfront commissions. As a result, we took another big broker out of the contingent game.

Contingent commissions are a hard habit to break for brokers. They won’t fade away by themselves, and a regulatory fix is unlikely. So it falls on insurance buyers to vote with their wallets and ask their brokers to refuse these bonuses.

The answer to the contingent commission problem lies in information and education. It’s our hope that armed with greater awareness, insurance buyers will be able to ask the ultimate question of their brokers: For whom do you really work, us or the insurance company?