In perhaps his last parting shot at the industry as New York's attorney general, Eliot Spitzer's office rocked the insurance world today by notifying four major insurers that they are no longer allowed to dole out contingency bonuses to their producers selling auto, homeowners, boiler and machinery, and financial guaranty insurance. With his action, he set in motion what might be the beginning of the end for contingency fees.
The move by the man who will be the Empire State's governor in January was not entirely unexpected, as settlement agreements on bid-rigging allegations struck with ACE, AIG, St. Paul Travelers and Zurich American clearly state that the four must alter their producer compensation structure in any line where more than 65 percent of coverage is sold by carriers not paying contingency fees.
But the agent community reacted nonetheless as if they had been whacked in the back of the head, and for good reason. No one has proven that independent agents have done anything wrong when it comes to contingency fees for delivering quality books of business to carriers. Only the biggest national brokerages were named in bid-rigging schemes hatched to reap the lucrative bonuses based on volume, not quality. The brokers caught cheating steered clients to whatever carrier would earn their firms the most money, regardless of the clients' best interests.
It's certainly no surprise that the 65 percent “tipping point” was reached so soon in personal lines, with captive agent carriers writing such large shares of both the auto and homeowners markets–and paying no contingencies.
Producer groups were quick to record their outrage, but the question is, what will agents do now besides vent? Michael DArelli, vice president of legislative and regulatory affairs for the Western Insurance Agents Association, said he heard that some agents will no longer write for carriers that drop contingencies. But if they go through with such a threat, won't that prompt attorneys general and insurance commissioners to challenge whether agents are placing business based on what's good for the agency, rather than the client?
This situation can only get worse for agents, unfortunately. Top officials in Connecticut are already talking about banning contingency fees–at least in commercial lines. And I could certainly imagine Gov. Spitzer making the banning of contingency fees one of the first orders of business with the legislature.
Agents have a well-deserved reputation for being among the most effective lobbyists on both the state and federal level in the country. I have a feeling they are going to need to use every ounce of their lobbying skills, twist every arm, bend every ear, and call in every favor to keep contingency fees from being prohibited outright–if it's not already too late.
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