Did Spitzer miss High Noon? Eliminating contingent commissions is a more complex directive than it seems on the surface. Many brokers and carriers are turning a deaf ear to the call for change, especially in the employee benefits arena

Risk & Insurance, August, 2005 by Peter Mead

Last January, the obituaries read: "Contingent commissions dead." Eliot Spitzer, the quick-draw New York Attorney General, cut another notch in his pistol grip.

Marsh, Aon, Willis and Gallagher--the top four insurance brokers--had all sworn to reject contingent commissions from carriers. Some industry observers said it was just a matter of time until the dust settled and the rest of the brokers did the same.

Maybe the obituaries were premature.

Most eyes were locked on Main Street, where property and casualty had the largest traffic in premiums. Some brokers received nearly half their P&C compensation from carriers in contingent "overrides," and bid-rigging and tying sales to reinsurance appeared. Under these circumstances, brokers indeed seemed caught in a classic conflict of interest between carriers and clients.

But High Noon may be waiting one street over, in employee benefits, where many brokers continue accepting overrides, and practice disclosure to eliminate conflicts.

Willis was the first broker to announce it would "abolish" overrides (Marsh "suspended" them a few days earlier). "Carriers shouldn't pay them. Brokers shouldn't accept them," said Willis CEO Joe Plumeri in his RIMS conference keynote speech in April. He concluded, "Let this be our defining moment, a moment when together, we put comfortable tradition behind us and rise above the controversy surrounding us."

Many brokers rejected the call, and the National Association of Professional Insurance Agents attacked Plumeri's speech. Even many top 10 brokers (ranked by 2004 total commissions) still accept overrides. (See the chart "Who's Accepting?" on page 45.)

Rick Elliott, national employee benefits practice leader for Willis, has tried to recruit carriers to abolish overrides. "The general reaction I get is, 'Now the broker will be disclosing it, so that's no problem,'" he says. "And more broadly, if somebody jumps first, they're fearful that if they're one of four or five carriers a broker's reviewing to recommend to their client, and they're the only one that doesn't pay the broker a bonus, then they put themselves at a competitive disadvantage."

Joe Foley, senior vice president of market development for UnumProvident Corp., the largest disability carrier, seems to agree. "Eliminating contingent commissions would be fine with us," says Foley. "But ... it's hard to change in isolation. We would welcome clear direction on the regulatory side or from brokers or customers. The vast majority of producers are still saying that in their view, contingent commissions are fine, and they are expected as part of the business relationship." UnumProvident pays contingent commissions to brokers.

Competitive pressure from brokers like Willis may help move the market, Foley says. That influence might be appearing first in the recruiting wars for sales talent, rather than actual sales. Elliott estimates the Willis benefits practice has picked up 50 Marsh alumni in the last 12 months. At the same time, however, regional brokers who accept overrides have also lured away producers from Marsh, Aon and Willis.

Brokers who reject contingent commissions are taking heat during their transition to a new model, but carriers are affected, too. Most benefits carriers have little or no direct sales force, relying almost entirely on brokers and consultants to produce sales. "There's no dear consensus within the whole distribution channel," Foley says. "Some brokers want to do it one way and others want to do it another, and it's difficult for a carrier to have multiple approaches to distribution and compensation. We would rather have it all one way or the other."

According to Ben Haas, a principal with the Glen Allen, Va.-based broker Hilb Rogal Hobbs, "Most of the major carriers in employee benefits are continuing to pay overrides, and perhaps 80 percent of the carriers HRH works with do so."

ECONOMIC ARGUMENTS

Employee benefits markets have a different override equation than P&C markets.

Benefits overrides are smaller than those in P&C, usually about 10 percent of a broker's total commission on a sale, and therefore only about 1 percent of the premium, according to Foley of UnumProvident and Haas of HRH.

In employee benefits, brokers typically don't provide claim-intake services, an area where overrides could create a conflict of interest.

To Foley, these facts mean overrides have relatively little impact on employee benefits markets, suggesting the system doesn't need reform. To opponents of overrides, they mean reform could be accomplished with minimal pain.

Employee benefits overrides may be generally smaller than those in P&C, but not always. According to Spitzer's investigation of benefits broker Universal Life Resources, 45 percent of ULR's 2003 income was in overrides, and UnumProvident Life Insurance is one of the carriers alleged to have paid them, presumably at or near that level.

It isn't likely to occur again. San Diego-based ULR was released from litigation by California Insurance Commissioner John Garamendi in return for rejecting overrides and following stringent transparency and disclosure rules, while Garamendi's litigation continues against Cigna, MetLife, Prudential and UnumProvident. But the big gap between the standard 10 percent override and ULR's 45 percent raises the question of whether contingent commissions generate a conflict of interest in employee benefits broking.