Contingent commissions

From Wikipedia, the free encyclopedia

Contingent commissions is a term used in the American insurance industry for any kind of broker's commission which is contingent upon some event occurring (instead of a commission paid on the sale itself). In the UK this form of payment is known as Overriders.

Theoretically, this term could apply to any type of brokerage industry, although most do not feature these types of payments. Contingent commissions could be used to prevent a conflict of interest between the wholesaler and the broker, if the broker would otherwise have an incentive to provide the wholesalers with a large number of bad customers. An example from the mortgage brokerage industry would be if the brokers' commission depends on the borrower continuing to repay the loan, rather than being paid in a lump-sum when the loan is issued.

In practice, contingent commissions paid by insurance companies to brokers have typically been contingent on the broker steering a certain amount of business towards the insurance company, and have not been contingent on a particular buyer's behavior.

Criticism of contingent commissions is based on the fact that they are structured so that insurance companies compete (among brokers) on the fee paid to the broker rather than the price to the buyer. This creates a conflict of interest for the broker influencing him to recommend his customer to place his business with an insurer who offers a higher level of contingent commission to the broker. Another criticism is that the full brokerage commission is not necessarily disclosed to the buyer, who therefore has less knowledge of the broker's incentives.

The practice of Overriders has been defended on the basis that payments are made based upon the whole book of business that a broker places with an insurer and not for individual cases; and that the practice is intended to compensate brokers for activities carried out on behalf of the insurer, rather on behalf of their customers (for which they receive brokerage or fees).

In 2004 New York Attorney General Eliot Spitzer led an attack on the contingent commission practices in the U.S.A. insurance industry, though the fallout from his investigations have led to worldwide changes. The attack was not so much on the practice in and of itself, but on the allegations that the insurance companies had an oligopoly agreement between each other (not at will but caused by the immense influence of the largest brokers) to submit false prices to stifle real competition.

In 2005 the insurance broker Arthur J. Gallagher & Co. agreed to a $27 million settlement with the Illinois Attorney General with regard to accepting contingent commissions and decided to end the practice of collecting contingent commissions within the company. Other settlements following similar investigation include Marsh, Aon, and Willis.

[edit] External links