A View From The Press Box

I am with the small agents on this. The big guys made their deals in order to stay in business and this should not obligate others to abide by those deals.

I am, however, a proponent of transparency, and I believe that the small guys must disclose their contingency arrangements to their customers.

I agree with Michael D’Arelli.

In America, many industries compete by rewarding sales and service performance with bonuses tied to a variety of metrics--volume being only one of them.

The key to consumer protection is transparency, which should apply throughout the value chain.

Reform the system! Eliminate all contingency fees.

Agents and brokers should be compensated on straight commissions so customers can know what they are charged.

Carriers should not be allowed to pay out an insured's excess premiums in contingency fees to any agent or broker, big or small!

We need to clean up our act in this business and then let the public know it.

Where a system would be pre-disposed to adverse selection, such as a straight commission system, how should the insurer seek a worthwhile book of business?

It occurs to me that only through the encouragement of financial benefit for the agent or broker, vis a vis contingent commissions, is any insurer truly capable of capping adverse selection.

Should an agent be permitted to write at will any piece of business they should so desire, clearing only underwriting at the front end and with no accountability at the back? Adverse selection would be the expected norm, not the exception.

Seeking to eliminate compensation programs which have benefitted the vast majority of agents and insurers alike, to say nothing of investors and the public at large, is to encourage adverse selection and a soft market function so clearly undesirable to all parties--a price war.

While the goal of transparency accounting should be lauded and applied in all circles, public and private, it should not be used to justify cutting such a wide swath through the system which has served so well for so long.

To do so is to pave the way for non-competitive insurance markets, which have already taken hold in the auto market of certain Eastern states.

Furthermore, why are tranparency and contingent commissions regarded as not compatible? Disclose all of the commisions to the individual insured client and include the contingency with this.

A better understanding of the apparatus of insurance by the general public is a reasonable goal with this debate.

Why not tell them the reasons behind a contingent commission? I'd personally feel better knowing my agent sought to insure good risks. All the better for solvency and stability.

The national brokerage community is shamelessly attempting to mitigate their guilt by implicating all who are rewarded for performance excellence.

They cleverly confuse the crime with the punishment.

The crime was not acceptance of performance-based revenue(contingents), but bid rigging!

The punishment was forfeiture of the contingent income.

I read your praise of Michael D’Arelli of the WAII, but his organization is not the only independent agent association concerned about the mistreatment of Main Street independent insurance agents by companies and regulators wanting to take their contingent commissions away.

PIA Western Alliance Executive Vice President Clark Sitzes and the board members of the PIA Western Alliance, as well as the four PIA chapters covering nine Western states that created the Western Alliance have been on top of this issue from when Eliot Spitzer first filed charges against Marsh & McLennan back in late 2004.

We have been very vocal in editorials in our weekly newsletter about this subject and have sent numerous news releases to insurance media like your magazine expressing our concern.

Main Street independent insurance agents are not mega-brokers and they have broken no laws.

As you know, PIA National recently filed an amicus brief over the Zurich settlement with Mr. Spitzer and other attorneys general. We share Mr. D’Arelli’s point of view and, actually, were at the front of this battle from day one.

Below, I am including an editorial that we ran in our Industry & Association News in April 2005, written by Clark Sitzes, PIA Western Alliance Executive Vice President

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The PIA Western Alliance has always supported vigorous insurance oversight and believes penalties should be imposed when agents or brokers break the law.

As an association we regularly school our members to make sure their practices are in compliance with the law.

We also have a responsibility to pay attention to the now evolving nature of disclosure requirements.

The PIA Western Alliance is not against disclosure--we just want balanced regulations that take into account the needs of consumers while not placing burdensome requirements on producers.

We applaud regulators like New York Attorney General Eliot Spitzer and California Insurance Commissioner John Garamendi for bringing companies bilking investors and customers to justice.

What we would like them to note is in their passion to mete out justice to wrongdoers, they are meting out a different type of justice to small businesses and a brand of justice that could spell devastating future financial consequences for Main Street’s independent agents and brokers.

The push to implement new agent/broker disclosure regulations lump the small-to-mid-sized insurance agency into the same category as mega-insurance brokerage firms. They paint everyone with the same brush and essentially say all must suffer because of the wrongdoing of a few.

This outcry for change is interesting. It has become more important for regulators to “appear” to correct a problem than taking their time and making the correct correction.

Instead of gathering information and thinking this through, groups like the National Association of Insurance Commissioners hastily put together regulations that have caused more confusion than clarification.

It’s unfortunate that overzealous politicians—and the people making the biggest impact in this issue are politicians with eyes on higher office—are radically changing the face of the industry and those changes are unnecessary.

Through new regulations and settlements with the world’s largest brokerage houses, politicians like Mr. Spitzer and Mr. Garamendi are pointing fingers at everyone but themselves.

Their agencies should have caught these problems earlier, but didn’t. It wasn’t lack of compliance or laws that triggered the investigations—it was insider information from a disgruntled employee.

Another point: the media cites the need for new regulations while overlooking the fact that these illegal practices were stopped with laws already on the books. Regulators had the authority to enforce those laws and eventually did.

That brings us to an important question: why do we need tough new laws if the tough old laws worked?

This leads to more questions:

Will new rules prohibit others from doing the same thing in the future?

Will they help insurance regulators quickly see when rules are being bent?

The sad answer is no.

Someone wanting to commit illegal acts under the new laws will do so with the same impunity as before.

And that leads us full circle back to our first question, and one we wish these politicians would ask themselves—if the tough old laws work, why do we need new ones?

The rhetoric for new regulations is doing damage to the independent agency system.

Reasons for California’s new regulations—and in states considering similar changes—are based upon the presumption that the goal of every Main Street insurance agent or broker is to get their hands as deeply into a customers’ wallet as possible.

Though it’s not stated, the implication is that agents and brokers are deliberately misleading consumers so they can make a greater profit.

Nothing could be farther from the truth.

Now Willis CEO Joseph Plumeri says "contingent commissions are inconsistent with client advocacy and unacceptable for insurers to pay and agents and brokers to accept.”

Main Street independent agents and brokers have not used contingency commissions in an illegal manner. They haven’t hidden anything from their customers.

And unlike Willis, agents aren’t “volunteering” to enter settlements that include substantial business reforms.

The insurance marketplace needs variety in order to properly serve the diverse needs of our customers.

Different insurance operations will operate under various forms of earning/compensation structures. One-way of doing business has never been successful and we don’t see how it will be in the future.

Mr. Plumeri and others want to transfer the financial impact of their settlements to independent insurance agents and brokers because they’re worried about their retirement portfolios.

Our members’ retirement portfolios are just as—if not more important—than theirs. The people we represent do not operate in the mega-insurance market segment. Their earnings models are not close to that of Willis and others.

Do you see the irony in this scenario? Willis and others agreed to eliminate contingency commissions as part of their settlements and want to punish us for their misdeeds.

Even more ironic is that these brokerage firms are worth billions and the loss of contingencies is a mere inconvenience. For the vast majority of independent insurance agencies the loss of contingencies could tell a very different story.

It seems no matter how hard us little guys try to perform honest business transactions, someone is dragging us down.

I have seen agencies steer business to satisfy co-oped purchases, meet volume commitments and now the big boys' contingency snafu, and I am tired of it.

Apparently we all will now have to divulge our commissions to each client on each policy--more paperwork.

I don’t know about the rest of the agents, but I am just trying to make a decent living while protecting my clients assets.

If we all have a good year and there is a little profit to spread around, I don’t see why I should not get my slice because some of the heavyweights screwed up.

Maybe there could be an honesty test before receiving contingency rewards? Let the big brokers swallow their medicine and shut up!!!!

It is more than coincidental that the big brokers, who were caught with their hand in the cookie jar, are the ones now pontificating that ALL agents & brokers should give up their contingency revenue.

I couldn't agree more witih Michael D'Arelli. Mr. Spitzer's probe did a lot of good, but now we must protect the industry against over-reaction from politicians and (apparently) big brokers.

If politicians can't understand that the entrepreneurial culture throughout American business has incentives for sales/profit success as the cornerstone of private enterprise, and that the independent agency system is part of that sales culture, then its up to us to make sure they understand.

It's obvious the big brokers don't.

Thank you for printing Mr. D’Arelli’s comments on the giant brokers' suggestion that all independent agents give up contingent bonuses. It was refreshing to read.

I don’t feel that my agency should suffer for the acts of a few giant agencies who felt that they had to cheat in order to get richer than they already were.

I work hard to write a good book of business for my companies, and I appreciate their sharing the good results on the loss ratios with my agency.

My contracts require me to produce a good volume of business, but also to generate a profit for the company with the business I write.

Seems fair to me.

Thank you for the podium.

In reading these different opinions on contingent commissions I can only have one thought. Those that produce quality are rewarded. They are not and should not be rewarded for volume, but for placing quality business with a carrier that they care enough about to have a relationship.

In my 44 years in this wonderful business I have watched a few large, if you would, houses push business down companies' throats and watched the companies accept it because of huge volume. I can tell you a large volume of poor business does not make money for anyone, and in fact hurts the insureds in the long run. There are places to place less than good business. To many try to pry it into preferred markets and then they have yelled that their volume should get them a bonus.

Just because a few dirtied their skirts, do not try to punish the Main Street agent who tries day after day to do a good job for their carriers. We make money when our agents earn contingent commissions, our agents make money and our good insureds profit.

Dick Hays
NW Regional Manager
Hallmark General Agency
American Hallmark Insurance Company

Your comments in your “Broker Chutzpah” column of Nov. 6 [based on this blog entry] are right on.

If you think about it, it’s absolutely ridiculous that Messrs. Gallagher and Plumeri are calling for an end to contingent commissions for everyone, and not just for the national brokers who were busted for their abusive activities.

Hats off to Michael D’Arelli for calling this one like it is.

Marsh and all the other miscreants have done the entire industry a terrible disservice, and for the national brokers to call--sanctimoniously--for all retailers to give up contingents is outrageous--"unbelievable chutzpah,” in Michael’s words.

Nicely put!

As your column suggested, the big brokers need to swallow their medicine and shut up.

Contingent commissions is the smoke screen brokers and companies are using to hide the real issue.

They were caught rigging bids. We're now supposed to believe they wouldn't rig bids if it wasn't for those nasty contingencies.

The nature of these mega-brokers' business is different than a "main street" agent. A consumer can go down the street or make a phone call and check with another agent representing the same carrier to see if a "main street" agent has rigged a bid.

A few brokers and companies control certain markets, making it extremely difficult to perform the same due diligence and make sure they're not being duped.

Eliminating contingencies doesn't keep these brokers from again doing what they did--charging inflated premiums and collecting inflated commissions by acting like they've shopped an account. It doesn't keep insurance companies from being their accomplice and giving inflated quotes.

What they're really concerned about is losing a competitive advantage. They don't want their prior unethical or criminal activity to put them at a competitive disadvantage to a new competitor in the market. Mega-brokers won't be able to collect as much income as another agency competing for the same account.

Insurance companies could also be at a competitive disadvantage when recruiting agencies. So, to keep the playing field the same as it was before, the innocent will be punished and all the new laws won't keep the guilty from doing the same thing all over again.