"I don't believe as a regulator--and as a believer of our free-market system--that it's any of my business to tell the industry how they are going to compensate each other, provided we do what we have to do to protect consumers."

Mr. Mills emphasized that the marketplace has already answered the contingent-fee question regarding "Marsh's, Aon's and Willis' of the world."

The three top commercial brokers all agreed to drop the fees paid by insurers after investigations by the department and New York Attorney General's Office determined that they served as hidden payoffs to brokers for improper steering of clients, bid rigging and other improper or illegal conduct.

"These brokers have already said they will no longer use them, and some of the biggest insurers have stopped paying contingent fees," New York's top insurance regulator told the luncheon participants.

But Mr. Mills said the same rule shouldn't apply to what he termed "Joe Smith Insurance Agent."

People recognize that there is a difference between a mega-broker and a "Main Street broker," he said.

"I do a lot of traveling in Upstate New York, and when I leave New York City, I am not dealing with Marsh's and Aon's. I am dealing with Joe Smith Insurance Agent on the Main Street," Mr. Mills said.

"For them, this is their life. This is how they make their living. We are not going to take that away."

For independent agents, the key is a better disclosure, not abandoning contingent fees, the regulator said: "We are working on regulations, and our regulatory approach is disclosure and transparency."

Mr. Mills also spoke about the latest focus of regulatory probes: potential misuse of finite reinsurance. "Of course, the thing everyone is talking about now is finite reinsurance. This is a very serious problem."

Finite reinsurance transactions in some cases are suspected of being falsely accounted for to improperly bolster insurers' financial picture.

Mr. Mills defended his recent circular letter, which requires insurers' chief executive officers to attest to the validity of all reinsurance contracts in force and that "an actual transfer of risk has occurred" as "a just and reasonable response to a very serious issue."

His letter has been criticized by industry members as being overly broad and potentially difficult to comply with.