For The Manager: What's so bad about loss-ration-based contingencies?

Recently, a number of articles have appeared in the press concerning lawsuits brought against brokers, alleging a conflict of interest when they accept fees from their clients as well as contingency bonuses from insurance companies. While the nature of the suits vary, the attorneys filing them and the reporters writing about them don’t seem to totally understand contingency contracts. Or perhaps semantics is the issue, because the lawsuits and the press refer to the bonuses variously as “profit-sharing agreements,” “contingency bonuses,” “contingency fees,” “volume bonuses” and “placement-service agreements,” as if these agreements are all the same-when in reality, they differ significantly.

After analyzing hundreds of various bonus agreements throughout North America, talking with hundreds of agents about strategically using such contracts, and giving dozens of speeches on the topic, I feel I have gained more insight than most into the subject. Based on my experience and the supposition that contingency bonuses pose a conflict of interest, I would place contingency contracts and their resulting bonuses into one of two categories: 1) those in which insureds’ loss ratios are a factor, and 2) those in which they are not.