Willis steps up campaign

Willis stepped up its campaign against contingent commissions by distributing a white paper written by law firm Edwards Angell Palmer & Dodge detailing conflicts of interest created by the payments.

The 16-page report is part of Willis’s Clients Before Contingents campaign launched at the end of April at the annual Risk and Insurance Management Society (RIMS) conference in Boston.

Brokers’ obligations

Joe Plumeri, Willis chairman and CEO, said in the introduction: "Willis has long opposed contingents because we believe they are at odds with the obligation retail brokers have to their clients to get them the best terms, conditions and price, and to advocate for them when they have a claim.

"It’s important for insurance buyers to know about the conflicts of interest created when insurance companies pay retail brokers bonuses for increasing premium volume and profitability.

"Not only do contingents have the potential to affect the loyalty and service insurance buyers get from their brokers, they also negatively impact the image of our industry."

The white paper examines in detail how contingent commissions began, how they have grown, how they work, and what the insurance buyer should know about the conflicts of interest they create.

Minimum disclosure

The lawyers write: "A regulatory arrangement built around minimum disclosure requirements tends to result in just that: minimum disclosure."

The law firm found that in the absence of "compelling" financial or regulatory benefits, there is little incentive for brokers to raise disclosure standards, thereby placing the burden on policyholders to ask more probing and direct questions of their brokers to assess the impact of contingent compensation on their insurance arrangements.

"Unless and until the policyholder believes it has all the information necessary to accurately answer this question, there is a risk that the trust and confidence relationship both parties to an insurance brokerage arrangement desire cannot exist."

The white paper says disclosure is not enough as it could be "undermined both by the broad range and scope of contingent compensation arrangements, as well as the inherent difficulty of demonstrating the ways in which a large-volume contingent compensation arrangement can be understood to affect broker behaviour with respect to a single placement or claim-reporting transaction."

Opt out won’t work

Don Bailey, chairman and CEO of Willis North America, dismissed the notion promoted by many brokers that insurance buyers can "opt out" if they don’t want their broker to accept contingents.

"Contingent commissions are paid annually on a broker’s entire book of business, so the cost to the individual buyer can’t be known until months after the insurance is purchased," he said.

"Even then, the accounting is so opaque that the true cost can’t be determined without an extensive forensic examination of the books. Willis wants insurance buyers to have the whole story, and by making this information available, it’s our hope they will be in a better position to ask the tough questions of their broker," Bailey said.

Questions to ask

The paper proposes a list of questions that insurance buyers should ask brokers regarding their role in the transaction and the compensation they will receive before authorizing them to make a placement on their behalf:

• What is your role in the insurance transaction and who do you represent?
• What will you be compensated and how will your compensation be calculated?
• What would have been the expected compensation for any alternative quotes presented to you?

Willis invites insurance buyer to contact it for help calculating how much in contingent commission their broker might be taking.