Thursday, 8 March 2012
Airmic steps in as contingent commissions raise their ugly head
Airmic has reiterated its 'distaste' for contingent commissions hot on the heels of Willis' announcement that it plans to accept this type of payment on Employee Benefit policies and rumours that other brokers may follow suit.
Airmic Chief Executive John Hurrell
Meanwhile Lloyd’s Director of Performance Management Tom Bolt has warned underwriters to check the legality of additional broker payments as they may contravene the UK's Bribery Act. In a market bulletin he urged 'a very cautious and rigorous approach'. This clearly has potential implications for the payment of contingent commissions.
When reporting his firm’s 2011 results, Dominic Burke, Chief Executive of JLT, said that the brokerage is more than prepared to compete with its competitors on net terms and does not need to distort the competition through leverage. “And I am afraid that is what some of our competitors are doing,” he added.
Following Willis' announcement, there are fears among opponents of contingent commissions that this may be the thin end of the wedge and, depending on the response of the market, the controversial payments may once again become the norm.
In reaction, Airmic said in its monthly newsletter that it still has concerns over the payments without going so far as to call upon Willis to change its policy.
“We have been fairly open in saying that we think contingent commissions are the most likely forms of remuneration to lead to conflicts of interest,” said Airmic Chief Executive John Hurrell.
“The very fact that they are contingent means that they are triggered by certain factors which in turn means that will influence behaviour so it will either be growth or profitability whatever it might be. If it is growth then it is likely that it will tend to skew the market,” he added.
Airmic said it is not its job to tell brokers how to run their businesses and which business models they should adopt.
However, they added that all 'off slip' income runs the risk of introducing conflicts of interest and that contingents create more potential conflicts than any other source of income.
“Members have expressed very clearly their negative views on contingent commissions which, by their very nature, risk distorting competition and bringing heightened conflicts of interest due to the incentive structures built into this type of remuneration,” said the association.
“Members will make decisions about their selection of brokers based on many factors including the level of transparency around their remuneration and the way in which the broker manages any conflicts of interest. The greater the potential for such conflicts, the more difficult it becomes for brokers to satisfy their clients on these issues,” it added.
In his warning over broker payments contravening the Bribery Act, Lloyd's Mr Bolt clearly had contingents in mind when he stated: “Payment by the insurer of additional fees, charges or commissions (or brokerage outside the ordinary range) to a broker which acts for a policyholder including under a line slip...raises concerns that the additional payment might be seen as inducing or influencing the broker to place business with the insurer contrary to the broker’s client’s best interests or which might otherwise cause improper performance by the broker of its duties.
“This is particularly the case where the additional payments are calculated by reference (whether directly or indirectly) to the amount of business underwritten by the insurer or by reference to the profitability of the business,” he continued.
“Considerable care therefore needs to be taken before any such additional payments are agreed having regard to the underlying commercial reality of the arrangement in question rather than merely to how it is represented or described,” he concluded.