At best, there's something distasteful about insurance brokers accepting payments from "contingency agreements" or "placement service agreements" from insurance companies for placing business with them

Risk & Insurance, June, 2004 by Jack Roberts

At best, there's something distasteful about insurance brokers accepting payments from "contingency agreements" or "placement service agreements" from insurance companies for placing business with them. At worst, there's something fraudulent.

Now New York Attorney General Elliot Spitzer has sent subpoenas to the largest brokers looking for evidence of wrongdoing

What is a "contingent agreement?" It could be seen as a kickback. They encourage "brokers to steer customers to insurers that will profit the broker, but not necessarily benefit the customer," says the Washington Legal Foundation.

Some brokers characterize the payments as "volume discounts." Others say the fee covers some of the extra costs involved in placing the business with that insurer. But this sounds hollow, even to many risk managers.

The big brokers under investigation--Marsh, Aon and Willis--insist the agreements are disclosed, often on the web site or to the client. Those disclosures, from my look at the web sites, are not easy to find, nor very specific.

There would probably be nothing wrong with these arrangements if brokers passed on the "discounts" to the clients, lowering the price for those insured. If the brokers need to provide special services, then those services should be identified and billed separately. Even that ignores what a broker's commission is supposed to cover if not the cost of placing insurance. But the risk to brokers isn't just the loss of income. It is that the issue could explode into a wholesale questioning of broker compensation and the broker-client relationship.