From the September 2009 issue of Treasury & Risk magazine

Commission Slip

In 2005, then-New York State Attorney General Eliot Spitzer won an $850 million settlement from insurance broker Marsh & McLennan and largely ended the practice of major brokers collecting contingent commissions from insurers on sales of commercial policies. Now the Illinois Department of Insurance's decision to allow Arthur J. Gallagher & Co., the nation's No. 4 broker, to resume collecting such commissions threatens to bring back a practice risk managers dislike and distrust.

"For nearly five years, we've had transparency in the buying of insurance," says Shari Natovitz, risk manager for Silverstein Properties, which gained fame as the owner of the World Trade Center in New York City. "But now the old practice of brokers collecting commissions from both sides of the deal is creeping back in."

Natovitz says the issue isn't a problem for Silverstein because it has "a broker who refuses to accept commissions from the insurance companies whose policies he sells." Still, she says, "with the Illinois decision, we're back on a slippery slope."

The Spitzer settlement applied only to large national brokers, and smaller regional brokers continued to collect contingent commissions. Gallagher argued that it needed a "level playing field" and should be able to collect contingent commissions, too.

The Risk and Insurance Management Society (RIMS) opposes any return to contingent commissions. "Companies, counties and other buyers of insurance coverage risk getting less adequate insurance when brokers are steering them to certain insurers in order to get higher contingent commissions," says RIMS board member Terry Fleming, risk management officer for Montgomery County, Md. "The system is inherently a conflict of interest if the broker is getting paid by both the buyer and the seller."

RIMS is calling for a broad prohibition on contingency fees, which can run as high as 25%, or at least a requirement for full disclosure of all commissions, Fleming says. "Right now, no state has such requirements." New York and Maryland are also considering re-allowing contingency commissions for large brokers, so far without any clear plan for transparency rules.

David Bradford, executive vice president of insurance consultancy Advisen, says a survey his firm recently conducted found risk managers to be ambivalent about contingent commissions, acknowledging the potential conflict of interest, but saying it is "manageable."

Silverstein Properties' Natovitz agrees, but says that means risk managers must make certain that brokers are getting the company the best deal available. Smaller companies don't have risk managers to do that kind of due diligence, she says.

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