April 28, 2004 by Canadian Underwriter
Hub International’s Kaye Insurance Associates Inc. is amongst a group of brokerages who are being asked to provide information to New York Attorney General Eliot Spitzer as part of a probe into contingent commissions.
Also receiving subpoenas thus far are Marsh, Willis and Aon. The brokers have all released statements noting that they will comply with the request for information, but insisting contingent commissions are a common practice in the industry. As well, all three note that they disclose such contingent arrangements on their web sites and in contracts.
Contingency fees come on top of commissions, and are given in respect of the amount of business a broker places with the insurer, or on the basis of the insurer’s profitability.
The question is whether this represents a conflict of interest in that it encourages brokers to place business with a specific insurer to receive greater compensation. However, the Council of Insurance Agents and Brokers (CIAB) in a statement released this week notes that brokers are aware they should disclose such arrangements, sometimes called “placement service agreements” (PSAs), which are a long-standing form of compensation. The council says it is not aware of any complaints regarding the agreements, or that commercial clients do not understand how the contingent fees work. “Commercial property & casualty customers are sophisticated buyers of insurance. The Council has confidence that they are aware of these arrangements and understand their purpose.”
CIAB notes that PSAs have some value for commercial clients, in that they strengthen the brokers relationship with the carrier, which helps the broker find the best coverage for their client. As well, the council notes, the Risk and Insurance Management Society (RIMS) which represents commercial insurance buyers has given PSAs the nod, provided proper disclosure is given.