As Aon Announces Resumption of Fees, Contingent Commission Controversy Continues

With Aon's announcement last week that it would resume accepting contingent commissions, two of the three largest insurance brokers say they have returned to accepting the once-maligned fees.

"Much of the market was scared or forced away from contingent or supplemental commissions after then [New York] Attorney General Eliot Spitzer went after a number of companies in late 2004," said Robert Hartwig, president of the Insurance Information Institute. "You're only seeing the latest evolution away from the post-Spitzer view of contingent commissions."

Returning to contingent commissions could mean reverting back "to those dark days when the insurance consumer was not the prime focus of the insurance deal," said Scott Clark, secretary of the Risk Insurance Management Society, which remains opposed to contingent commissions altogether.

The three largest insurance brokers, Marsh & McLennan Cos., Aon Corp., and Willis Group, had sworn off contingent commissions in the wake of Spitzer's investigation into the broker industry in 2004. That investigation into broker bid rigging and contingent commissions sparked a number of lawsuits, more state investigations and ultimately multimillion-dollar settlements.

Earlier this year, Aon, Marsh and Willis were released from settlements with regulators, and allowed to accept contingent commissions for the first time since 2005, said Wes Bissett, senior counsel of government affairs for the Independent Insurance Agents & Brokers of America.

Marsh was the first of the big three to announce that its Marsh & McLennan Agency, as well as its affinity and personal business, would again take the commissions, even while the firm's core brokering operations in the United States and Canada would not. Last week, Aon, too, said it would accept contingent commissions "where appropriate and legally permissible" (BestWire, July 21, 2010).

Willis Group, which said it will continue to refuse contingent commissions from carriers in its retail brokerage business, responded to Aon's announcement by saying "Willis now stands as the world’s only insurance broker to refuse to accept contingents in its retail business."

Simply refusing to accept contingent commissions doesn't necessarily mean insurance buyers are getting a better deal, Bissett said.

“Willis is one of the few companies that negotiates for a higher commission up front. Regardless of what their service is like, they are guaranteed payment,” Bissett said. “They don’t tell consumers their broker fees are higher than the standard commissions that other brokers would receive.”

“Willis’ compensation is no higher than that of our competitors,” the company said in an e-mail. “The difference is, we’re completely upfront and transparent about how we get paid. Unlike independent agents, we don’t accept year-end bonuses from carriers that are contingent on premium volume and profitability. It seems hypocritical for the Big I to question our fully transparent approach to business when they are openly advocating for no transparency in agent compensation.”

Contingent commissions never went away altogether, as smaller and regional brokers continued to accept the payments even when the big three turned them down.

In 2009, property/casualty insurance companies paid brokers $2.97 billion in direct contingent commissions, according to BestLink, which provides online access to A.M. Best's Global Insurance & Banking Database.

That's a 36% drop from 2004, the high-water mark for contingent commissions in the last decade, when carriers paid $4.67 billion in contingent fees to brokers, according to BestLink.

But contingent commissions have traditionally been a small part of the total revenues insurers pay brokers.

Direct broker commissions, not including contingent fees, rose 3.9% from $49.54 billion in 2004 to $51.47 billion in 2009. In the past decade, these broker commissions -- excluding contingent fees -- reached their highest level, $53.02 billion, in 2007 before contracting the next two years along with the overall market during the economic crisis.

Contingent commissions, which some carriers have traditionally paid brokers to reward them for producing profitable business or for reaching a certain volume of business, came under fire by regulators in part because insurance buyers weren't always aware of their existence.

Companies that choose to accept contingent commissions must still abide by regulator's transparency rules, Bissett said. He noted the investigations into contingent commissions resulted from Spitzer's allegations of broker bid rigging, but the two issues are "apples and oranges."

"Contingent commissions were never illegal, even though they were depicted and portrayed as such," Hartwig said. "Some very small number of transactions had [bid rigging] issues, and contingent commissions were swept up in that."

Clark, who is also the risk and benefits officer for Miami-Dade County School Board, said RIMS views Aon's move as a step backwards. Contingent commissions "muddy the water," Clark said. It's very difficult for a broker to serve two masters -- carriers and clients -- at the same time, he said.

However, just because Aon and Marsh have resumed accepting contingent commissions does not mean carriers will pay them, Hartwig said.

"It's not at all clear that the largest brokers will be able to once again earn the same type of contingent or supplemental commissions they did prior to entering into those agreements [with regulators,]" Hartwig said.

The top three global brokers ranked by 2009 total revenue, respectively, were Marsh, Aon and Willis, according to Best's Review's annual ranking.

(By Meg Green, senior associate editor, BestWeek: [email protected])