Contingency creeps

Contingency creeps

Beaumont Vance

Contingency fees are once again drawing the attention of the risk management community. After the Eliot Spitzer imbroglio, those large brokers standing under the hot glare of scrutiny uniformly disavowed these erstwhile commissions. But now some of the big brokers are considering returning to the pre-Spitzer status quo. It boggles the mind.

Of course, there are some minor changes. The payments made by the insurers to the brokers will surely be given a new name. The formulas for calculating the amount of premium to be paid back to the broker will also be changed. But at the end of the day, the setup will remain the same: insured pays premium and broker fees, insurer pays broker, and broker keeps payments from both insured and insurer.

The problem is, and always will be, conflict of interest. Insurance buyers and sellers want diametrically opposing outcomes. An attorney for an insurance carrier recently provided me with his insiders view of contingencies. “Contingencies are no different than if I received payment from opposing counsel in addition to the salary I am paid by my company,” he said. He thought for a minute and added, “Can you imagine how my motivation would change if I got a percentage of the settlements I negotiate with plaintiff counsel?” One has to wonder how a broker could possibly serve two masters any better than my attorney friend.

In reading the comments in some insurance chat rooms, one frequently finds those in favor of contingent commissions comparing them to sales commissions. For example, one person posted the following; “Have any of these risk managers gone to their senior executives and demanded that their own companies’ salespeople not be paid on the basis of productivity?”

The analogy is, of course, specious. When one goes to a salesman at a car dealership, there is no conflict of interest. Everyone knows that the salesman is paid by the car dealership. No matter how friendly the salesman or how many times he cheerfully insists that he is willing to negotiate a great deal on the client’s behalf, it is clear that he is serving the interests of the car dealership and himself. The more the customer pays for the car, the more the dealership makes, plain and simple.

A more accurate analogy would be that of an auto broker. These professionals, in exchange for a flat fee paid by their client, will negotiate the lowest possible price for an automobile from the seller, often a car dealership. In essence they tell the seller, “Because you pay my fee, I will represent your interests in the negotiations and get you the best possible price.”

It makes sense to pay a professional to represent your interests. They know more about the tricks of the trade and better understand the pricing structure and so can demonstrate savings even when their fees are added to the sales price. But imagine if you found out that the auto broker was also getting a commission from the car dealership. Could one still trust that he was operating in the best interests of the buyer?

I applaud Willis CEO Joseph Plumed and the Risk and Insurance Management Society for taking a strong stand on this issue. Others should follow suit. The energy being spent trying to figure out a way to skim more money from premiums could be spent on innovative products and more efficient methods. The money spent on defense and settlements in the Spitzer case alone could have paid for a computerized policy system for Lloyd’s.

The contingency issue harms the entire insurance industry–especially the brokers. Fighting for the right to have a conflict of interest is a poor way to demonstrate one’s value to the client and a great way to erode the mast that the broker community has worked so hard to establish. The cost of restoring that trust surely will eclipse the benefits of fostering an ongoing conflict of interest.

BEAUMONT VANCE manages risk for San Microsystems Inc. He can be reached at risked.com.

COPYRIGHT 2007 Axon Group

COPYRIGHT 2007 Gale Group