Study: Incentive Commissions
January 26, 2005
By Associated Press
A study by one of the nation's leading consumer advocacy groups has found that incentive fees - which are at the center of a New York state probe of the commercial insurance industry - are also used to reward agents for selling individual home and auto insurance policies.
The study, released Wednesday by the Consumer Federation of America in Washington, D.C., found "wide use of troubling contingency fees."
Author J. Robert Hunter, a former insurance commissioner for Texas, said that the incentive commissions, which are over and above regular commissions, "entice agents to do the wrong thing."
The fees he found include "steering commissions," which are special payments by insurers to agents to direct more business to the insurer, and "profit-based commissions," which are paid to agents that sell policies that experience low levels of claims.
"Steering commissions are dangerous for consumers because agents earn more if consumers pay more, which can lead to higher rates," Hunter said. "Profit-based commissions are more lucrative for agents if consumers have lower losses, which can tempt agents to delay the filing of claims or to discourage consumers from filing claims in the first place."
Hunter said the report was aimed at making consumers more careful about buying insurance.
"Obviously there are honest agents out there who wouldn't hurt you," Hunter told The Associated Press. "On the other hand, who expected Marsh & Mac to do what they did?"
He was referring to New York-based Marsh & McLennan Companies Inc. The nation's largest brokerage was accused last fall by New York Attorney General Eliot Spitzer of bid rigging and price fixing in the sale of property and casualty insurance to business customers. Spitzer also accused Marsh & McLennan of conflict-of-interest in demanding contingent commission from insurance companies in exchange for sending more corporate business their way.
Wes Bissett, a senior vice president with the Independent Insurance Agents and Brokers of America, a trade group based in Alexandria, Va., called the allegations in the study "a reckless mischaracterization of independent agents and the manner in which they are compensated."
Bissett noted that incentive fees "are legal and legitimate in every state in the country." And, he argued, that "it's a form of compensation - and a relatively small part of it, too."
Bissett was particularly piqued by the suggestion that insurance agents would delay in processing claims.
"Mr. Hunter has made this allegation before but never provided anything to back it," he said. "No agent is going to sit on a claim. That agent would lose that client, and the most important thing is retention of the client."
Bissett said there were more than 3 million licensed insurance brokers and agents in America sell life, health, property and casualty and other forms of insurance for individuals and businesses.
The Consumer Federation study looked at the payment practices of the 20 largest sellers of personal lines of insurance. It said that the five companies that paid the most in contingency commissions were:
Federal Insurance Co. of Warren, N.J., which owns The Chubb Corp., which paid commissions equivalent to 2.31 percent of premiums written; Travelers C&S, part of The St. Paul Travelers Companies Inc. of St. Paul, Minn., 2.18 percent; Zurich American Insurance Co. of Schaumburg, Ill., 1.94 percent; Allstate Insurance Corp. of Northbrook, Ill., of 1.74 percent; and Hartford Fire Insurance Co. of Hartford, Conn., 1.67 percent.
Not all of the companies could be reached for comment late Tuesday.
Jim Dudas, an Allstate spokesman, said that "we define contingent commissions as that which is contingent on agents selling products that offer the right coverage at the right price. ... It's not about steering business or rigging bids. That just doesn't happen with us."
The Consumer Federation study also said the top 20 insurance sellers included companies that paid no contingent commissions.
These included Farmers Insurance Exchange of Los Angeles; GEICO of Washington, D.C.; State Farm Mutual Automobile Insurance and State Farm Fire & Casualty, both of Bloomington, Ill.; and San Antonio-based USAA.