May 26, 2004 by Canadian Underwriter
Despite risk managers and brokers shrugging off investigations of contingent commission arrangements, a new survey suggests commercial insurance buyers do see such payments as a conflict of interest.
The study, “A Season of Discontent” by Advisen, shows 69% of the 331 risk managers responding think contingent commissions represent a conflict of interest. Such commission arrangements are paid to brokers for placing a volume of business, or more profitable business, with an insurer. Recently the agreements have come under fire by U.S. regulators, with investigations launched in New York, California and Connecticut.
Heretofore, such commissions were allowed on the basis that they would be properly disclosed to the client. But risk managers surveyed by Advisen rate the level of disclosure as low. On a scale of one to five (with five being the highest level of disclosure), 67% rate the level as three or lower. A full 23% rated is as the lowest possible level of adequacy, and only 18% gave brokers the highest marks for disclosure.
Two other insights come out of the study first, that while risk managers may see a conflict in theory when it comes to contingent fees, many say they still feel confident their broker is acting in their best interest. In some cases, this is related to the fact that the broker is not fully informed of what the contingent agreement is, and is therefore not influenced by it. Second, risk managers do not feel that stopping contingent commissions would have a significant impact on what they pay for insurance perhaps, Advisen notes, the reason so few have publicly spoken out against the practice. Only 22% of risk managers think a ban on contingent commissions would reduce their premiums, while the majority saw no impact at all. And, many risk managers comment, the likely effect of a ban on contingent commissions would be an offsetting increase in the broker’s regular commission.
Advisen plans a follow-up study to address questions raised by the survey.