The insurance industry was hit with a blow in October when allegations of bid-rigging and kickbacks surfaced. New York Attorney General Eliot Spitzer filed a state civil lawsuit against Marsh & McLennan Cos., the world's largest insurance brokerage, on Oct. 14, charging that the brokerage solicited inflated bids from some insurers in an attempt to steer business to Marsh's favored providers.
The suit also zeroed in on contingent commission and placement service agreements (PSAs), volume incentives paid to brokers by insurance companies. After the suit was filed, Marsh and two other large brokers, American International Group (AIG) and Ace Ltd., announced they would no longer accept contingent commissions, which accounted for hundreds of millions of dollars worth of income for the companies.
While insurance professionals immediately denounced bid-rigging and price-fixing, they expressed concern about Spitzer's characterization of contingent commissions and PSAs as kickbacks because both are legal.
According to the Independent Insurance Agents and Brokers of America (IIABA), contingent commissions are fees derived from year-end calculations that consider an account's profitability, loss experience, or other factors, based on form agreements with carriers and brokers. PSAs are payments to brokers for the placement of business with specific carriers that are not based on those year-end calculations; they are negotiated individually by each broker and carrier that uses the agreements. “You see incentivized sales programs in almost every industry in the U.S., whether it's real estate, computers, or widgets,” says Charles Symington, senior vice president for federal government affairs of the IIABA.
For dealers wondering if they've been victims of bid-rigging, there might not be a way to tell, says Bruce Packard, a Dallas-based attorney who specializes in insurance and class-action litigation. “Bid-rigging is flat-out a crime,” he says. “There's nothing a person buying a policy can do to deal with that issue. If quotes are received and they are false quotes, intentionally high quotes, you're never going to know. But that's a crime and that's going to stop.”
Companies that bought policies through a broker named in the civil suit might want to shop their business and get comparisons on the pricing or the terms, says Joseph Annotti, vice president of public affairs of the national Property Casualty Insurers Association of America. If they have serious concerns, they should contact their state insurance commissioner's office.
It's entirely appropriate for a policy holder to ask his agent or broker about the fees he's collecting for the business, Symington says. Ask if the broker has agreements with the insurance companies he's recommending and how those fees impact the policy's price. Also, look at the fees in terms of the total relationship and assess the broker's or agent's overall performance.
“How does he act at other times than placing of the policy?” Packard says. “When I have issues, does he participate in getting them resolved for me? Do I only hear from him when there's a premium to be collected? All you can ask for is honesty. Over time, you'll see whether he's more concerned about your interests than his interests.”
It's unlikely that the announcement from major brokers that they will stop accepting contingent commissions will result in lower insurance costs, industry veterans say. More probable is that commissions will be replaced by a comparable fee that is disclosed to the policy holder. “That's half their bottom-line profits,” Annotti says. “I can't see them abandoning that. They'll move to make the transactions with clients as transparent as possible.” —Pat Curry is a contributing editor for PROSALES.