Contingent Commissions: Will Insurance Brokers Return to Past Practice?

If all politics is local, then in the United States, the insurance business is too. That’s why a decision by the Illinois Department of Insurance has ramifications beyond the Land of Lincoln. It could boost the earnings of the world’s two biggest insurance brokers: Marsh & McLennan Cos. and Aon Corp. It could also lead them back down the path of temptation.

Ironically, the decision didn’t even directly involve them. CEO J. Patrick Gallagher of Arthur Gallagher & Co. (considered the fourth largest broker) was lobbying Illinois Attorney General Lisa Madigan to again allow “contingent commissions.”

On a conference call with analysts Gallagher said that he had met with Madigan about 25 times in the past four years. His persistence paid off when Illinois agreed to allow Gallagher & Co., which is headquartered in Illinois and therefore regulated by the state, to resume collecting the commissions.

Contingent commissions allow the insurance broker to be paid twice. The insurance company pays a contingent commission to the broker to push his products to companies, and the companies pay the broker to pick the right insurance product for them.

Could this be a conflict of interest? Former New York State Attorney General Eliot Spitzer thought so four years ago when he forced the major insurance brokers to stop. It didn’t hurt his case when Spitzer discovered that Marsh & McLennan was involved in kickback schemes. The company was forced to pay an $850 million fine and its then CEO resigned.

But everything old is new again. Spitzer now blogs, after a sex scandal forced him from office as New York State governor. Marsh’s next CEO was also forced out when he couldn’t make up the nearly $800 million a year in revenue the broker lost when it gave up the commissions. Insurers were also supposed to stop paying them, but sharp lawyers found a way to keep paying them by renaming them “supplemental commissions.”

More importantly, the smaller brokers, who didn’t agree to the settlement, flourished at the expense of Marsh and Aon and Gallagher. And that was Gallagher’s argument to Madigan, he said.

It now looks as if Spitzer’s mandate will be reversed. Marsh and Aon are likely to get increased revenue from contingent commissions if things go back the way they were. For Marsh, which lost its top rating to Aon after the scandal, an extra $800 million or so is nothing to sneeze at.

But not everyone is jumping at this. Willis Group Holdings CEO Joseph Plumeri says his company, the third largest broker, will take the high road and not accept contingent commissions.