RIMS Takes Position on Broker Contingency Fees

The organization representing North American commercial insurance buyers has not come out against broker contingent commissions, but is issuing strong words on the need for full disclosure of such arrangements. In its policy statement on compensation agreements, the Risk and Insurance Management Society (RIMS) says, “because of the complex nature of insurance transactions, a special trust relationship built on a foundation of truth and honesty must exist between broker and client…disclosure of agreements and relationships with insurers is an important part of the integrity of this relationship.”

Contingency fees – commissions which are based on factors other than a percentage of premium, such as the profitability of a book of business to the carrier – have come under fire from several U.S. insurance departments, who say they have received complaints that such commissions are not being fully disclosed. The fear is that brokers will be inclined to place business with an insurer based on the extent of contingent fees rather than on the best interests of the client. RIMS met with the major brokers several years ago to discuss the contingent commission issue and determined that such fees were permissible as long as the arrangements were disclosed to the client.

RIMS has outlined what it regards as being full disclosure: “Disclosure should include compensation or fees related to the broker’s overall book of business, as well as those fees related to specific offices, to individual primary and excess coverage, and to reinsurance placements. Existence of compensation arrangements should be disclosed prior to placement of business and annually by line of coverage.” RIMS also such disclosure should take place with or without a client’s specific request. “RIMS has always advocated for an open and honest dialogue between brokers and risk managers,” says RIMS president Nancy Chambers, risk manager for the Waterloo Region Municipalities Insurance Pool. “We believe that undisclosed contingency fees have the potential to compromise the very basis upon which this relationship is built.”