Contingency fees “not dead,” says Fitch Ratings Agency

Despite efforts to eliminate contingent commissions, “they are not dead,” according to Fitch Ratings Agency’s recent report ‘Review and Outlook 2007-2008.’
Fitch said it believes “the major brokers are finding ways to incrementally increase revenue in the absence of contingent commissions, albeit in different forms and to varying degrees.”
One strategy, for example, is for brokers to work on accounts as “managing general agents” (MGAs) or underwriting managers.
“[T]he collection of fees for acting as a managing general agent (MGA) or underwriting manager is now deemed to be acceptable following an amendment to the NYAG settlements,” Fitch wrote in its report, referring to the settlements arising out of New York Attorney General Eliot Spitzer’s investigation into contingent fees.
“As an MGA, the broker works as an agent of an insurance company rather than on behalf of its corporate clients, therefore reducing the potential for conflicts of interest.”
Fitch said it expects the incremental revenue derived from MGA accounts to be modest. But such arrangements could smooth over some of the inequities larger brokers face relative to smaller peers regarding commission payment practices.
“For the most part, middle-market and regional brokers have expressed no intention of foregoing contingent commissions, which places larger brokers at a competitive disadvantage in this regard.”