October 28, 2004 by Canadian Underwriter
Fast on the heels of the U.S. controversy over broker commissions and practices, the situation is heating up in Canada.
Thursday, the Canadian Council of Insurance Regulators (CCIR) confirmed it would be working in tandem with the Canadian Insurance Service Regulatory Organizations (CISRO) on investigations by provincial insurance regulators into commissions practices.
At the same time, the Ontario Trial Lawyers Association (OTLA) is calling on that province’s legislature to looking into what it estimates as $290 million in contingent commissions paid to brokers. “Although some insurance companies appear to recognize the questionable nature of these payments, at least one insurance company has indicated that it will continue this practice,” says OTLA president Robert Munroe in his call for government investigation.
However, in the U.S., commercial brokers are hitting back at claims by New York Attorney General Eliot Spitzer that contingent commissions represent a conflict of interest. The Council of Insurance Agents and Brokers (CIAB), in a strongly-worded statement, points to the long-standing history of using such forms of compensation. Moreover, the Risk & Insurance Management Society (RIMS), the largest body representing commercial insurance buyers in North America, accepts the practice of contingent commissions in 1998 as long as disclosure was made. Also, the New York Insurance Department also looked into the practice in 1998 and formally accepts its use.
“Contingent commissions are both legal and proper, and they have played an important and long-recognized role in the insurance equation,” says CIAB president Ken A. Crerar. “Although contingent commissions account for only about 5% of the revenue of brokerage firms, they are a leading indicator of the quality of business in the broker-insurer relationship.” The risk management expertise offered by brokers benefits not only insurers, but clients, by reducing exposures. “Without any kind of reasonable compensation for this service which can be determined only after a loss history is established the value of the broker and the incentives for good risk management can be eroded.”