Buyers Reassess Position On ContingencyFees

The nation's leading risk manager group, reacting toinvestigations into possible conflicts-of-interest created bybroker contingency fee arrangements with carriers, is reviewing itslong-standing acceptance of the practice.

However, it is unlikely that the Risk and Insurance ManagementSociety will change its position from the stand taken in 1999, whena public feud with buyers and regulators over the propriety of suchside deals prompted the major brokerage firms to make their feearrangements public, RIMS officials noted.

“Our statement is that we support transparency, we supportcommunication between broker and client, and we believe thatcontingent fees are to be disclosed when the client wantsinformation about them, and that the broker ought to provideinformation that is appropriate for the client,” said JaniceOchenkowski, vice president of the External Affairs Committee forNew York-based RIMS.

Ms. Ochenkowski, who is senior vice president of risk managementwith Jones, Lang LaSalle, a commercial real estate company inChicago, added that RIMS has provided its members with guidelineson broker compensation through its Quality Improvement Process.Those guidelines include “the risk manager asking about contingentfees and understanding the impact it may or may not have on hisclient's account,” she said.

The use of contingency fees is under investigation by theCalifornia Department of Insurance and the New York AttorneyGeneral's Office. (See related story on this page.) At issue iswhether contingency deals could result in brokers advising theircustomers to accept overpriced, unneeded or insufficient coveragefrom insurers in return for extra fees or higher commissionrates.

Although RIMS is reviewing its stand on the issue, “I don'tthink there is the presumption that we'll need modifications toit,” said Ms. Ochenkowski. “Most of us were comfortable with thegeneral position then, and we're just looking at it to make surelanguage remains appropriate.”

Lance Ewing, whose tenure as RIMS president ended May 1, saidthe current investigations “will enhance the dialogue” as towhether there is a conflict of interest. He noted that beforemaking a determination, the risk management community “will needall the information the entire transaction process and the partsthe broker and underwriter play in that process.”

Brokers who have disclosed that they have been subpoenaed saythat they reveal the fee arrangements to customers, and thatcontingency payments are a long-standing, accepted practice.

Mr. Ewing, who is vice president of risk management for CaesarsEntertainment Inc. in Las Vegas, noted that his company's letter tobrokers requires disclosure of contingency fees. “Most riskmanagers ought to be inserting that into their broker of recordletters so that there is full transparency,” he said.

He added that “the onus [for disclosure] should fall on thebroker. This 'don't ask, don't tell' type of thing is not good forall three parties the broker, the risk management professional andthe carrier.”

He emphasized that carriers are also part of the situation. “Ifsomebody refused to pay those fees, would that have caused asnowball effect, or would they have been standing outside in thecold with not a lot of brokers bringing them the business?” heasked. “I think they need to be part of the conversation aswell.”

Several large insurers have publicly denied that they have beensubpoenaed in the New York investigation. However, Mr. Ewingthought otherwise and commented: “Obviously they're going to bepart of that conversation.”

Nancy Chambers, risk manager for the Waterloo RegionMunicipalities Insurance Pool in Kitchener, Ontario, who succeededMr. Ewing as president on May 1, said RIMS believes transparency is“the only way to have a good, professional relationship with ourbrokers.”

She said the broker should identify, at a client's request, “theclient's insurers with whom they have a contingency or any similaragreement. That way the client can obtain a reasonable estimate ofwhat the contingency revenue is, generated by those agreements,”and apply the latest average contingency factor to the respectivepremiums.

If the estimate is substantial and if the client requestsadditional information, “we believe the brokers should calculatethe approximate contingency revenues by the carrier and provide theclient with the aggregate total of their calculations,” sheadded.

Reproduced from National Underwriter Edition, April 30, 2004.Copyright 2004 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.