The Wall Street Journal: Big Brokers Want Fees Reinstated
Sep 21, 2009
Published September 19, 2009
Big Brokers Want Fees Reinstated
The biggest insurance brokers are in negotiations with regulators to reinstate a type of commission banned due to conflict-of-interest concerns, a development that could restore some, but unlikely all, revenue the commissions once generated.
Regulators are conducting negotiations to revise, or even lift, the 2005 ban on “contingent commissions” for the three largest brokers as measured by revenue. Contingent commissions are paid by insurers to brokers and are based on factors such as how much business a broker brings to an insurer and how profitable it is.
Since the ban took hold, the large firms have complained that they have been disadvantaged because it hasn’t applied to smaller competitors.
“We are sensitive to the need for a level playing field, so companies are treated equally,” Connecticut Attorney General Richard Blumenthal said in an interview this past week. He predicted a resolution before the end of the year, and said, “We are mindful of the need to protect consumer interests.”
Mr. Blumenthal was one of the lawmakers involved in an investigation, spearheaded by then-New York Attorney General Eliot Spitzer, that led to the ban on the commissions for Aon Corp., Marsh & McLennan Cos. and Willis Group Holdings Ltd.
Mr. Spitzer’s investigation alleged that some Marsh brokers were rigging bidding to favor certain insurers. Mr. Spitzer alleged that this was done to steer business to insurers that paid Marsh big contingent-commissions payments common in the industry. Marsh settled Mr. Spitzer’s complaint in 2005 by paying $850 million into a fund to compensate clients, without admitting or denying the allegations.
Arthur J. Gallagher & Co., the fourth-largest broker, recently succeeded in negotiating an end to its own ban on contingent commissions in October. On a conference call earlier this month, J. Patrick Gallagher, chairman, president and chief executive of the firm, described a four-year slog of meetings with staffers of Illinois Attorney General Lisa Madigan over lifting the ban.
Arthur Gallagher estimated that contingent commissions will add $10 million to its annual revenue by 2011. Barclays Capital analyst Jay Gelb estimated in a note Tuesday that the commissions could add an additional $254 million in annual revenue for Marsh, $51 million for Aon, and $40 million for Willis.
Even with the change, brokers probably won’t collect as much as they used to from contingent commissions, the analyst said, in part because customers may resist paying the fees.
Marsh collected $845 million in contingent commissions in 2003, out of $11.6 billion in revenue that year.
One step toward relaxing the ban on contingent commissions is a proposal for new commission disclosure rules by the New York State Insurance Department, industry groups say.
Write to Lavonne Kuykendall at lavonne.kuykendall@dowjones.com