Spitzer rightly is revolted by the “pay to play” game, as he calls it–but he is wrong in his implication that the mere existence of contingencies confirms that producers are steering business. I mean, does he really think the vast majority of independent agents with contingent-commission contracts have the clout to force insurers to “pay to play”?

Sometimes Spitzer's actions have seemed specifically directed at independent agents, rather than at the national brokers he originally targeted. For instance, in his settlements with ACE, AIG, St. Paul Travelers and Zurich, he forced the carriers to stop paying contingent commissions not only on excess casualty insurance, the product at the heart of the original scandal, but also, oddly enough, on any product in which the market share held by companies that don't pay contingencies reaches 65%. As everybody knows, direct writers, who don't pay their agents contingent commissions, long have controlled about two-thirds of the personal-lines market. So it hardly came as a surprise when Spitzer announced late last fall that, according to A.M. Best data, the “tipping point” had been reached. Consequently, the four carriers no longer can pay contingent commissions on homeowners multiperil and on private passenger auto liability, physical damage and no-fault. (Two specialty commercial-lines products, boiler and machinery and financial guarantee insurance, also are affected.) That would have had next to no effect on Marsh, even if it hadn't renounced contingent commissions, but it will be a significant hit on the finances of independent agents using those carriers, particularly on those agents deriving the majority of their business from personal lines.

Of course, Spitzer was right to pursue brokers for suspected fraud and bid rigging and to go after insurance companies for colluding in any such schemes. They are illegal, and an attorney general is supposed to enforce the law. But when Spitzer or other attorneys general pressure insurance companies to do away with contingent commissions–which have been perfectly legal for years–they overreach. They go beyond mere law enforcement and try to make the law.

Indeed, Spitzer has even forced the insurers to help him. In its settlement, Chubb, like the other carriers that have come to terms with the former attorney general, “agrees to support legislation and regulations in the United States to abolish Contingent Compensation for insurance products or lines.” With his litigation, Spitzer in essence has been regulating the insurance industry one carrier at a time. But as the settlement agreements show, his real agenda has been to regulate contingent commissions out of the industry all at once, or at least state-by-state. For instance, Connecticut Attorney General Richard Blumenthal, who perhaps will pick up the mantle of Harasser-in-Chief now that Spitzer has moved on, last month announced that he is thinking about seeking legislation that would outlaw contingencies in his jurisdiction.

The definition of contingent compensation in the Chubb agreement includes not only the upfront, volume-based contingencies that looked an awful lot like bribes in the Marsh case but also the customary contingencies paid to independent agents for meeting volume, growth, loss-ratio and retention goals. It does, however, carve out this exception: “A fixed commission paid to a Producer, set prior to the sale of a particular insurance product, and that may be based on, among other things, the prior year's performance of the Producer, shall not be considered Contingent Compensation.”

I assume this exception is what will allow Chubb to implement its supplemental producer compensation system. Let's hope that its move points to a way out of this injustice. If insurers are going to play ball with a few overzealous attorneys general, they at least have an obligation to see that their agents are not the ones getting beaned.