IBC, Brokers Respond to Commission Controversy

Canadian insurers and brokers are responding to the U.S. controversy over broker commissions with a new “consumer code of rights and responsibilities”. The Insurance Bureau of Canada (IBC) and the Insurance Brokers Association of Ontario (IBAO) released the code, along with guidelines for disclosure of broker commissions, fast on the heels of the investigation by New York Attorney General Eliot Spitzer and the resulting probes by U.S. regulators and legislators into commission practices.

Spitzer has filed a civil suit against Marsh alleging “bid-rigging” but also accusing the broker of conflict of interest in accepting contingent commissions. Employees of AIG and ACE have pled guilty to the bid-rigging allegations, and internal investigations at Zurich and GE Insurance (formerly Employers Reinsurance) have revealed bid-rigging incidents which have resulted in employee dismissals.

While no such allegations of bid-rigging have surfaced here in Canada, insurers and brokers say they wanted to take early steps to ensure higher levels of transparency around commissions. This includes the consumer code, as well as web-based disclosure of broker compensation by insurers, and a point-of-sale disclosure protocol for brokers.

The code includes several rights for consumers, such as full disclosure, fair treatment, complaint resolution and privacy, but it also contains responsibilities – consumers must provide complete and accurate information to insurers, ask questions about their insurance coverage and participate in dispute resolution, explains Mark Yakabuski, Ontario region vice president for the IBC. “This code clarifies and brings together the rights of consumers – rights that have been in place in insurance contracts and insurance law for decades.” The web-based disclosure by insurers will include whether a salary is paid to brokers, a range of basic and contingent commissions if paid, as well as whether the insurer has any financial stake in the brokerage.

Yakabuski stresses that while the industry wants to respond to consumer concerns, it takes exception with stories of “hidden commissions” reported in the media. “There is nothing hidden in how insurance companies compensate those who sell their products. There is no such thing as hidden commissions. Insurance companies have always volunteered this information and reported it to insurance regulators, the role of whom is to protect consumers.”

In the U.S., recent hearings on compensation by a Senate subcommittee saw insurers and brokers go face-to-face with Spitzer to defend the use of contingent commissions. Insurance buyers, however, are showing little support for the practice. The Risk & Insurance Management Society (RIMS) indicated at the hearings it would support a ban on contingent commissions. And a survey of 700 risk managers by Advisen Inc. finds 54% think contingent commissions represent a conflict of interest.