Arthur J. Gallagher & Co.’s July deal with Illinois authorities to allow it to again accept millions of dollars in contingent commissions beginning Oct. 1 likely will open the door for similarly banned brokers to do the same, observers say.

However, the Risk & Insurance Management Society Inc. opposes the move and reiterated its belief that contingent commissions pose “an inherent conflict of interest” and should be banned.

On the other hand, the largest brokers applauded what they say is Illinois’ efforts to level the playing field, while risk managers’ opinions were mixed (see story, page 27).

In 2005, Gallagher agreed to pay $27 million in client restitution and cease collecting contingents to settle concerns raised by Illinois authorities that it steered business to insurers that paid the highest contingent commissions.

The move came after larger rivals Marsh & McLennan Cos. Inc., Aon Corp. and Willis Group Holdings Ltd. agreed to give up more than $1 billion in contingent commissions and pay more than $1 billion to settle similar allegations by New York and other authorities. Several insurers also agreed to either abandon or limit contingent commissions as part of separate settlements with various state authorities.

The rest of the industry, however, never has followed suit, and large brokers have said that puts them at a disadvantage.

J. Patrick Gallagher Jr., chairman, president and chief executive officer of the Itasca, Ill.-based broker, said during an analyst conference call last month that he met with Illinois Attorney General Lisa Madigan’s office about 25 times during the past four years to discuss the inequity.

“We’ve said all along that we were willing to give (contingents) up if the rest of the industry was going to follow,” Mr. Gallagher said. “I’m very, very pleased that our attorney general and director of insurance—once they recognized that, in fact, the industry standard of contingent commissions was not going to change—agreed that it would be unfair to leave us in a situation where we could not collect them.”

Ms. Madigan’s office said as much in explaining the decision to lift the ban.

“Gallagher has fully complied with the terms of our settlement and has committed to providing its clients with full disclosure of its compensation arrangements. Because other brokers continue taking contingent commissions, the ban may require Gallagher to operate at a competitive disadvantage, particularly in this difficult economy,” Ms. Madigan’s office said in a statement.

Illinois Director of Insurance Michael T. McRaith echoed the attorney general’s remarks, adding that while there is a growing trend toward full transparency, “we do need to continue to work toward a uniform standard for disclosure so that when a customer makes a decision, that customer is making a decision based on all the information that is relevant.”

It remains to be seen whether other states will follow Illinois’ lead and lift the contingent bans on Marsh, Aon and Willis.

The Illinois attorney general’s office said it was willing to discuss the issue with Chicago-based Aon, which paid $190 million in 2005 to settle client-steering and other allegations leveled by Illinois, New York and Connecticut.

The New York State Insurance Department, which was a party to the Marsh, Aon and Willis settlements, said it also is willing to revisit the issue.

“Right now, we are focused on increasing disclosure across the board,” a NYSID spokesman said, referring to the department’s efforts to regulate producer disclosure standards. “Our goal is to level the playing field, and at some point we will need to revisit the settlement agreements and see if they still work. But our primary focus right now is our producer compensation disclosure regulation,” he said.

New York Attorney General Andrew Cuomo and Connecticut Attorney General Richard Blumenthal could not be reached for comment.

Analysts say Gallagher’s deal with Illinois paves the way for Marsh, Aon and Willis to amend their settlement agreements in the near future.

“I think it definitely will” open the door for Marsh, Aon and Willis to begin accepting contingents again, said Mark Lane, a principal and research analyst with William Blair & Co. L.L.C. in Chicago. But contingents likely never will be a central part of large brokers’ business models like they once were or material to their finances, given “the fact they dropped the practice in the name of increased transparency and putting their clients first,” he said.

“The regulatory pendulum is clearly shifting back in favor of the large insurance brokers,” Keith F. Walsh, an analyst with Citigroup Global Markets, said in a note to investors. “Whether we call a commission contingent, supplemental or enhanced, there is a clear path opening for insurance brokers to earn more money.”

New York-based RIMS said it was “disappointed” by Illinois’ move to lift Gallagher’s ban, especially as it was made without any concurrent proposal to regulate producer compensation disclosure.

“The investigations, admissions and fines that culminated in the agreement signed by some brokers in 2005 prove that these practices can be, and were, manipulated to the detriment of the insurance consumer,” RIMS said in a statement.

In an interview, RIMS Vp Terry Fleming acknowledged that New York authorities “are probably going to move in (a similar) direction at some point” and lift settlement bans against Marsh, Aon and Willis.

“We’re encouraged that at least the New York State Insurance Department is working on a new regulation for transparency and disclosure and our feeling is that it will be in place before any of the settlements are lifted. Or at least that’s our hope,” said Mr. Fleming, who is director of the division of risk management at Montgomery County, Md.

Marsh and Aon applauded Illinois’ efforts.

“We continue to believe that the settlement agreements should sunset and that a clear set of rules grounded in transparency should apply equally to all insurance producers,” Dan Glaser, Marsh chairman and CEO, said in an e-mail.

Greg Case, Aon’s president and CEO, during an analyst conference call described Gallagher’s amendment as being much more about leveling the playing field than about collecting contingent commissions.

“Even with these steps, there’s still a long, long way to go in the context of the overall industry,” Mr. Case said.

Willis Chairman and CEO Joe Plumeri, who previously has called for abolishing contingent commissions, said during an analyst call that even if New York granted Willis permission to again accept contingent commissions, it would not do so. But Mr. Plumeri said he expects Willis to be paid similarly to brokers that accept contingents, just in the form of upfront commissions.