New York Attorney General and Governor-elect Eliot Spitzer has notified four leading insurance companies that, under agreements reached with his office earlier this year, they may no longer pay contingent commissions to agents and brokers that sell automobile, homeowners and certain other insurance products to consumers. This notice comes as part of settlements that each of the insurers — ACE, AIG, St. Paul Travelers and Zurich — entered into earlier this year, resolving charges of bid rigging and other improprieties related to contingent commissions.
PIA immediately issued a response to the action.
“It is grossly unfair to impose contrived restrictions on the ability to compensate producers in a legal and honest manner,” said PIA Executive Vice President & CEO Len Brevik. “PIA believes that authorities should be prohibited from using their settlement powers to bring about a ban on all contingent compensation.”
“Many industries — not just the insurance industry — rely on performance-based compensation, which is legal, honest and brings many benefits to the insurance marketplace, as it does to our entire American economy,” Brevik said. “Eliminating all contingent compensation is patently unfair to those who never committed abuses, such as Main Street insurance agents. Main Street agents are not Mega-brokers.”
“This is an example of settlement powers run amok. Our job is to make sure that this judicial madness does not become a model imposed on the entire insurance industry,” Brevik said.
Under the terms of their earlier settlements over broker compensation practices, the insurers agreed to stop paying contingent commissions on any line, product or segment of business if insurers that represent 65% of the gross written premiums on that line were not paying such commissions or were to reach similar settlements. The insurers also agreed they would immediately stop paying contingent commissions on excess casualty coverage through 2008, after which contingents on that line would be also subject to the 65% rule.
In letters to the four carriers, Spitzer said the 65% mark had been reached in several lines and that, as a result, the insurers could no longer pay contingent commissions on those lines beginning January 1, 2007.
PIA immediately reached out to these carriers asking what actions and process can PIA members appointed with these carriers anticipate. So far, we have had a brief conversation with St. Paul Travelers. In that conversation, PIA was advised that all 2006 contingency earnings through 12-31-06 are not affected, and agents can expect to receive those payments. However, to comply with their settlement order and the provisions of their agency agreement, Travelers will be issuing notices to their producers that the 2007 contingency agreement is null and void at this time. That will be followed with an additional notice addressing how Travelers will revise their compensation system in order to maintain offering their agents a fair and equitable compensation.
Travelers sent this statement to PIA: “Producers expect us to pay a competitive, market-driven commission that differentiates for the performance of their business. And we will. Travelers will meet this commitment while living up to the terms of the settlement.” —Jay Fishman, chairman and CEO, St. Paul Travelers.
Zurich sent this statement to PIA: “Zurich has received the notice from the New York Attorney General (NYAG), is reviewing it and will take appropriate responsive action consistent with the terms of its agreement with the NYAG and Connecticut and Illinois Attorneys General. This development will not impact contingent commission payments for 2006. Zurich will continue to offer contingent commissions where appropriate from a business perspective, except where prohibited by regulation and legal agreements.”
AIG Agency Auto sent this statement to PIA: “Beginning in late 2004, AIG Agency Auto initiated a process to eliminate the contingency earning agreements in place at that time. AIG Agency Auto had no contingency agreements in effect in 2005 and 2006 among its producer force. AIG Agency Auto, and all other applicable AIG units, will be reviewing the recent notice issued by the New York Attorney General concerning the prohibition of payments on contingency agreements relating to certain coverages/lines of business, and will continue to comply with the terms and conditions of the settlement agreement.”
What It Means to Agents: Our discussions with these carriers, separate contacts involving affected state DOIs, the NAIC, discussions with our counsel and planned actions are all ongoing, in what is a very fluid situation. In addition, we are working in cooperation with several PIA affiliates. We will send special alerts as this situation unfolds. See the links below to articles in the National Underwriter and Insurance Journal for more detail and PIA’s public comments.
Spitzer Notifies Four Insurers on Contingent Commissions (Insurance Journal 11/30)
Spitzer To 4 Insurers: End Personal Lines Contingent Fees (National Underwriter 11/30)
December 5, 2006