Perspectives: Are Contingent Commissions Wrong if They're Disclosed?

Like Jason in the endless sequels of the "Friday the 13th" movies, the debate over contingent commissions just won't die.

Five years ago this month, then-New York Attorney General Eliot Spitzer unleashed a firestorm of controversy by filing a lawsuit against giant insurance broker Marsh & McLennan Cos. for steering "unsuspecting clients to insurers with whom it had lucrative payoff agreements, and that the firm solicited rigged bids for insurance contracts."

Spitzer cited "widespread corruption in the insurance industry," and called for the elimination of contingent commissions and bid rigging.

The industry took a collective gasp.

Amid a spate of lawsuits, state investigations and multimillion-dollar settlements among brokers and insurers, the big four insurance brokers -- Aon, Marsh, Willis and Arthur J. Gallagher -- all agreed to stop accepting those commissions.

With contingent commissions off the table, brokers have had to find new sources of revenue. Aon announced last week it would expand its consulting practice by launching Inpoint, a new insurance consultancy expected to compete not with other brokers, but with organizations such as McKinsey & Co., Accenture and Deloitte in offering advice to insurance carriers.

But contingent commissions never really died. Even while the big four brokers stopped accepting contingent commissions, many smaller, independent agencies continued to rely on them for a significant source of revenue.

Fast forward to this July, when Illinois gave Gallagher the green light to accept contingent commissions again on retail brokerage business effective Oct. 1, for the first time since the company swore off the fees in 2005.

Before people pick up pitch forks and prepare to storm the Illinois regulator's castle, let's consider that while contingent commissions were lumped into the bid-rigging scandal, they are a whole different animal.

While no one can claim that bid rigging is anything less than a crime, contingent commissions -- often offered by carriers to reward brokers for bringing in profitable business -- are not only legal, but a time-honored tradition.

Buy a new house, a car, or even an appliance or a new sofa, and you're likely to being doing business with a salesman who stands to gain a commission. Bid rigging is fraud, but contingent commissions are by all accounts a common form of payment.

What turns a contingent commission into a troubling potential conflict of interest is when it is not disclosed. Clients expect -- and rightly so -- that their brokers will be pure in heart and offer the best recommendations for them. How is this possible if the recommendation is tainted by the broker's secret desire to profit for steering the client in a certain direction? What might be best for the broker may not be best for the client, and therein lies the rub.

In the classic film about the Watergate scandal, "All the President's Men," the anonymous source Deep Throat tells Bob Woodward to "Follow the money."

You can't follow the money if it's not disclosed.

The Risk and Insurance Management Society recently released a report calling for "complete transparency and full disclosure of all revenue streams associated with the placement of insurance products." RIMS stresses that when a broker places business with an insurer, all compensation from that insurer must be "transparent or eliminated altogether."

Knowledge really is power. If clients have a complete picture of their options, including potential influences on their broker, they can make a truly informed decision.

In the words of U.S. Supreme Court Judge Louis D. Brandeis, "Sunlight is said to be the best of disinfectants; electric light the most efficient policeman."

So instead of driving a stake through the heart of contingent commissions, perhaps it is just a matter of letting the light in.