A survey by Advisen, Ltd.a New York-based consultant that works with the Risk and Insurance Management Society found that fewer than one in five buyers believe the level of disclosure they receive from brokers about contingency fees is “entirely adequate,” while 69 percent said such deals represent a conflict of interest. Over half56 percent went so far as to claim they believe their broker does not disclose contingent commissions in all cases.

The problem is that we are dealing solely with perception at this point, not reality. To many buyers, as well as some attorneys general and insurance commissioners, it might feel like an inherent conflict for brokers to accept bonus fees in return for placing business with one carrier over another. Advisen provided direct examples of such suspicions, citing quotes from several risk managers surveyed who “voluntarily offered extended comments on the practice.”

“My gut feeling is there is probably a conflict of interest. The secrecy of the brokers seems to support this notion otherwise they would be more forthcoming,” said one buyer. Commenting on the disclosure issue, another risk manager said that brokers “only give me information they deem is appropriate and on their terms. This is, of course, an unsatisfactory and untenable position.”

Do these “gut feelings” reflect reality? Where is the clear-cut evidence that contingency fees, disclosed or not, prompt brokers to place business with a particular insurer to the detriment of their client in terms of price and/or coverage?

There is a lot of smoke being generated about the potentially negative implications of contingency fees, but are there any actual smoking guns that catch brokers in the act of cheating clients to enrich themselves? Keep in mind that even an isolated incident uncovered by the many probes going on now might spell doomsday for contingency deals.

Mr. Spitzer and his colleagues aren't the types to allow a probe to become public, only to shrug it off after a few months, apologize to the targets, and say, well, we guess everything is hunky dory after all. State AGs are political animals who live for the hunt and the kill. They are unlikely to walk away from this without being able to claim some positive change for insurance consumers.

This cowboy doesn't have to put his ear to the ground to hear a stampede coming. If I were a broker, I'd be seriously considering alternative compensation options before I got run over.

Sam Friedman

Editor-In-Chief

Reproduced from National Underwriter Edition, May 28, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.