Despite the recent controversy over contingent commissions,consultants believe incentive payments play an important role inthe insurance industry in promoting a company's interests andhelping a carrier to differentiate itself from its peers.

In a Webcast last week entitled "Contingent Commissions: Growthand Distribution for Insurance Companies," members of DeloitteConsulting discussed contingent commissions and why they remain animportant sales tool for the industry.

Howard Mills, chief advisor for the firm's insurance industrygroup, and former New York insurance superintendent, said theprimary concern among regulators when it comes to contingentcommissions is transparency.

"Regulators want to know insurers have their client's interestsat heart," he said.

Edward S. Koral, senior manager with Deloitte Consulting, saidthe controversy that developed over contingent commissionsfollowing allegations of bid-rigging turned out to be a good thingon one level--it created a healthy dialogue about the purpose ofcontingents and the service brokers provide.

However, some brokers are still dealing with the loss ofcontingent fee income as part of settlements with regulators andstate attorneys general, which has had a negative effect with theloss of revenues and jobs. Some continue to look at consolidatingoperations or divesting portions of their firms, he added.

While an unlevel playing field exists, because most brokeragesstill accept contingency fees, there does not appear to be any movebeing made to ban such compensation altogether, noted Mr.Koral.

In fact, he said there is evidence that some carriers that onceshied away from contingents are now moving back toward the idea.The real challenge is maximizing disclosure and minimizing anypontential conflicts of interest.

"You can find a conflict of interest in anything. It's just aquestion of how you manage it," he observed.

Contingents are a force for motivation and influencing acarrier's strategic goals, according to Michael Vaccaro, seniormanager with Deloitte.

The loss of contingents lessens a carrier's leverage with aproducer, and limits a carrier's ability to differentiate itselffrom its peers, he said. Taking incentives away, he continued,actually hurts the relationship with producers and denies thecarrier the ability to "drive strategic behavior in themarketplace."

To compensate, what carriers need to do is develop good,effective incentive plans that do more than give a commission checkto an agency or brokerage firm, he said.

Good plans must motivate the sales force to move in a directionthat benefits the carrier's market plans, and also have effectivemeans of measuring performance, he noted. The sales force, too,must be able to see and understand the effectiveness of the design,he said.

Outside of financial rewards, insurers may want to considerbenefits they can give agents or brokers, such as lead generationor information services that producers could find useful.

Mr. Mills noted that no matter what form of compensation aninsurer chooses, regulators will always ask, "what value is createdfor insureds first. Their first concern is always going to be thatof the insured--the consumer. Is the compensation value passed ontothe insured? Then they will look at the positive values for theinsurers."

Enhanced risk mitigation, better record keeping, policyholderservicing and maintenance of the distribution network are allexamples of the services that "the regulatory community would finda positive value in," he explained.

On the negative side, anything that "has the slightest whiff" ofdriving insurance placement to meet volume targets might be shotdown by regulators.

He said while the current compensation playing field is "unfair"because not all brokers are allowed to accept contingency fees,this is the reality of the current situation, and those firmsprohibited from that compensation option must compensate, headded.

"Brokers and agents really do serve a very valuable purpose,"said Mr. Mills. "It is something that needs to be repeated andstressed because oftentimes it is lost in this debate." Here-emphasized that transparency remains the primary concern of allregulators when it comes to developing a compensation program.

Replays of the Webcast are available throughwww.deloitte.com.