Marsh will be allowed to accept contingent commissions for its managing general agency business under an agreement reached with New York's attorney general and superintendent of insurance.
In a U.S. Securities and Exchange Commission filing, Marsh & McLennan--Marsh's New York-based parent company--said it reached an agreement with Attorney General Eliot Spitzer and Superintendent of Insurance Howard Mills to amend its deal barring the world's biggest broker from accepting all contingent commissions.
Marsh agreed to forgo brokerage commissions after New York authorities charged that the bonus payments served as kickbacks from insurers to reward the firm for steering customers and rigging bids.
According to the filing, where Marsh acts as an MGA or underwriting manager, it will be allowed to accept contingent commissions. In acting as an MGA, it will not be necessary for the broker to seek permission from the retail customer and disclose commissions or other financial arrangements.
However, the agreement does not alter the firm's position when acting as the retail broker for a client. It is still barred from accepting contingent commissions and must still disclose all forms of compensation under such circumstances.
The amendment states that in order for these parts of the agreement to apply, Marsh must receive compensation only from the insurer as an agent placing the carrier's business and only communicate with the policyholder through a retail broker.
Andy Mais, a representative for the New York Insurance Department, explained that the superintendent and the attorney general agreed to the change because the policyholder relationship has an entirely different dynamic where Marsh is acting as an MGA.
In that arrangement, Marsh has no direct contact with the policyholder, he noted, while the ultimate buyer has their own broker who has the duty to inform the customer of the transaction.
"There is no potential conflict of interest," he said. "It is clear where the lines are drawn."
He added that Marsh first approached the department and attorney general about making changes to the agreement, and negotiations went on for months before a decision was reached.
MGAs have long fought attempts to ban contingent commissions from their books of business, along with additional reporting requirements. They have argued that since they are not dealing with the policyholder or collecting fees from the ultimate coverage buyer, they should not be subject to the same reporting requirements and limitations as a broker dealing directly with the consumer.
As for improving MMC's bottom line, in an analyst's note, David Small of Bears Stearns said the amendment would have minimal impact. He added that the news does not remove uncertainties about the company's earnings power for the future.
He also said the agreement would be "mildly helpful" to Marsh and the other major brokers who gave up contingents as part of their own settlements, and would pursue similar relief. However, it would hurt smaller brokers competing for MGA business with the major brokers, he noted.
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