Contingency plans: with the supplemental commissions some insurers are paying, agents can tell clients upfront what they will be paid for producing the business.

Call it what you will--incentive, supplemental or fixed--but some personal-lines insurers and producers are finding that noncontingent commissions may work just as well as contingent compensation to provide agents and brokers a motivational bonus.

It's not a move that's been made without controversy.

Earlier this year, Chubb Corp. and The Travelers Cos. agreed to discontinue providing their producers commissions contingent on future sales, instead offering supplementary commissions based on a producer's prior record. That move was a reaction to letters late in 2006 from state attorneys general from New York, Illinois and Connecticut, notifying Travelers, Zurich American Insurance Co., Ace Ltd., and later, Chubb, that as of Jan. 1 they could no longer pay contingent commissions to agents and brokers that sell certain property/casualty lines due to a provision established during settlement agreements over bid-rigging allegations.

The insurers were told to stop paying contingent commissions in any line of insurance where all insurers that write 65% of the gross premium for that line of insurance do not pay, or have agreed to stop paying, contingent commissions. The 65% "tipping point" was reached for homeowners multiperil insurance; private-passenger automobile physical damage; private-passenger automobile no-fault; other private-passenger automobile liability; boiler and machinery; and financial guaranty.

And so Chubb and Travelers moved to a supplemental commission. It's a subtle difference, yet one that speaks volumes. Contingent commissions, which are based on volume and loss ratio, are not releasable to the customer, as the amount of an agent or broker's commission would not be known until either was actually paid; but the percentage an agent or broker would receive on a supplemental commission can be disclosed to the customer at the time of purchase.

"Essentially they said they were going to revamp their contingent commission agreements; they agreed to not pay contingents when 65% of a line of business is not subject to contingents," said Tim Cunningham, a principal with agent/broker insurance distribution consultant OPTIS Partners in Chicago.

Chubb said it would stop paying contingent commissions to its agents and brokers in all lines of insurance, and instituted a program of "predetermined supplemental compensation" for its producers that will both compensate them for their contributions to the company's success and facilitate their communication with customers.

"It told them in advance what the percentage would be, and the percentage is based on the agents' prior three years' experience on volume and loss ratio," Cunningham said.

Travelers said in addition to personal auto, homeowners, boiler and machinery, and financial guaranty insurance, the company also would stop paying its agents contingent commissions in general commercial insurance lines that cover businesses, government agencies and other institutions.

"For all of the rest of our commercial products we offered our agents an option to sign up for the fixed supplemental compensation program or they could, for the nontipped lines, remain where they were," said Travelers spokeswoman Marlene Ibsen. The company plans to "see how things unfold" before making any such decisions for 2008. "We have high expectations they will move to this."

The structure of Travelers "fixed" compensation program, as the company calls it, keeps its agents "wholly compensated" yet offers them "greater predictability" than in the past, Ibsen said. "At the same time, it's responsive to the regulatory concerns."

Replacements Seem Equal

Personal lines agents seem "cautiously optimistic" with the new structure, said Steve Zogby, executive vice president of independent agency Scalzo, Zogby & Wittig Inc. of New Hartford, N.Y. The agency does not represent Travelers or Chubb, but does represent several other companies that support the current contingent-commission arrangement.

Replacements for contingent commissions seem on par with what agents received before, said Zogby, who also is chairman of the Independent Insurance Agents and Brokers of New York, a branch of the national association. "From what I've heard so far, they are.... I think some agents like them because they know up front what they're going to get next year."

What did bother independent agents was not being part of the decision-making process. "We weren't at the table; the agents were not represented in any way. This was done without our input," Zogby said. "It would have been nice if we were able to have a seat at the table for discussions, but that was not meant to be."

Travelers said it's happy with its decision thus far.

"We feel pretty confident that we've come up with something that is not only workable for our agents but has been widely embraced, even for those for whom it wouldn't be required," Ibsen said. And since the program looks back at historical performance, it gives agents a lot more predictability.

"Our experience to date, since we started rolling this out in March and offering it to people has been an overwhelming positive response from all fronts," Ibsen said. In fact a "substantial" amount of agents selling commercial lines have opted for the fixed compensation over variable compensation, she added.

While Travelers "has been a little more vocal--there are more press releases and postings on their Web site," Chubb has been "very quiet and focused" in making its business decisions about commissions, noted Debra Perkins, executive vice president for the Independent Insurance Agents and Brokers of America.

Both approaches are "understandable," Perkins said. The best word to describe how carriers are reacting to personal-lines incentive compensation would be "cautious," she added. "Because what they say in the press is not going to change their process or the progress of an investigation or litigation."

Representatives from Chubb declined to be interviewed for this article.

Keeping Watch

Most large insurance carriers have truncated their contingent commission agreements, Cunningham said: "They now have a separate agreement for commercial lines and a separate agreement for personal lines."

They're also quietly watching Travelers and Chubb "to observe what the experience is with new approaches, just like they would do with any other issues with changes in the marketplace," Perkins said.

It's "interesting" that carriers apart from Travelers and Chubb are "sticking with what they know" and are comfortable with the current system, Zogby said. "They're not changing. We're seeing incentive promotions and lots of thinking from different companies."

One insurer and one broker have vowed to keep their current contingent-compensation arrangements on principle. Liberty Mutual and Wells Fargo Insurance Services (formerly Acordia) are defending the use of contingent commissions and fighting lawsuits fried by the attorneys general that allege bid-rigging.

"We represent Peerless, a Liberty Mutual company," Zogby said. "They're the only one that seems to be sticking their heels in. They feel strongly enough about it to say 'we're doing the right thing.'"

"Recognizing agent performance through compensation is vital for us to remain competitive in the marketplace. We are committed to offering competitive compensation to independent agents with whom we do business," Liberty Mutual spokesman John Cusolito said. "Liberty does not pay any form of contingent compensation to any producer, broker, consultant or other intermediary that contractually represents the buyer in an insurance transaction."

IIABA supports such resistance efforts. "We applaud that they're fighting it because contingent compensation is perfectly legal," Perkins said.

On April 30, Willis Group Holdings Ltd., the nation's third-largest broker according to A.M. Best Co's list of Top Global Insurance Brokers, issued a statement saying it would not be accepting alternate incentive arrangements. The decision is consistent with the group's Willis Quality Index, which ensures client programs are placed with carriers based on product quality and performance.

"As currently designed, the proposals do not afford a conflict-free environment for the client and we are not going to take them," Willis Chairman and Chief Executive Officer Joe Plumeri stated. "For Willis, it's about making a principles-based decision because it's the right thing to do and is consistent with our Client Advocacy model."

"The proposals we have considered are based on 'if-then' equations and it does not matter whether the math is done on a prospective or retrospective basis; either way, we view these as contingents" Plumeri said.

Other industry folk showed support.

Research and consulting firm Celent of Boston released a statement the same day as Willis. "It's been a long, hard road for brokers forcibly weaned from contingent commissions by Eliot Spitzer and friends," stated Celent Senior Analyst Donald Light. "Willis' position is that these programs, [which] compensate a broker based on past business, are a distinction without a difference from the old programs that rewarded current business placement."

Cunningham echoed those sentiments: "I refer to it as a contingent commission in a different wrapper," he said. "If I gave you a dollar bill last year and I gave you four quarters this year, what difference does it make?"

Nevertheless, "It brings it full circle; it apparently keeps the AGs happy and it allows the companies to conduct business as usual," Cunningham added.

Sales Culture

Supplemental arrangements won't likely entice an independent agent or broker to sell more of one carrier's business over another's, Perkins said.

"I think agents are going to continue to sell the insurance to the best of the client's needs," Perkins said. "They're not looking to see 'if I will get X amount of dollars of additional compensation if I sell this insurance.' Their ultimate goal is to have a stable and growing client list."

While Chubb and Travelers' old approach to auxiliary compensation was prospective, their new approach is, "This is what we promise you'll get--you're entitled to it based on your past performance--on each piece of future business,'" Perkins said. "But either way it's compensation for performance, and that's a part of certainly every sales culture in the country."

"What we're doing is legal and it should be done," Zogby said. "Incentive is good for business; it's good for the agency and the company." It's also good for consumers: incentive helps drive good business to companies, which helps keep rates down, he added.

One distinction between the Travelers and Chubb supplemental programs and contingent compensation is that the supplemental commissions are guaranteed payments, Perkins said. Under contingent commissions, "If you don't hit those targets then you don't participate in additional compensation."

"I've heard that agents are optimistic about how this will unfold and that they're going to assess the success or any concerns they have as it unfurls; they're not prejudging," Perkins said.

"I have not heard complaints about the particular approach Chubb and Travelers have taken, but I certainly have heard that agents are watching and assessing, as would any responsible person," Perkins said. "I think they're watching and they're optimistic."

"And the feedback I've heard so far is that they're largely positive," Perkins said.

Cunningham's agent and broker clients at first were leery of the Chubb and Travelers arrangements. "There was maybe a sense of a fear that commissions were going to go away," he said. "It's proved fairly unfounded at this time. It's important compensation to agents; it represents a great deal of their profit."

"Insurance companies understand they would be at a competitive disadvantage--those who agreed with the AGs to not pay contingent commissions--ff they didn't replace their contingent commissions with something else," Cunningham said.

Agents are anxious to see how the year unfolds, Perkins said. The carriers will be watching as well--to see how the supplemental transitions work, assess agents' responses, and to determine if they will make changes to incentive compensation.

Learn More

Chubb Group of Insurance Cos. A.M. Best Company # 00012 Distribution: Independent agents and brokers

The Travelers Cos. A.M. Best Co. # 18647 Distribution: Personal lines agencies, brokers, direct marketing, Internet

Zurich Financial Services Group A.M. Best Co. # 86976 Distribution: Multichannel 

Ace American Insurance Co. A.M. Best Co. # 02257 Distribution: Personal lines are distributed by independent agents; commercial lines are served by national brokers

Liberty Mutual Insurance Cos. A.M. Best Co. # 00060 Distribution: Direct, independent agents and brokers, captive agents

For ratings and other financial strength information about these companies, visit www.ambest.com.

Key Points

* Producers are cautiously awaiting the outcome of supplemental commissions, such as those offered by Chubb Corp. and Travelers for the first time this year.

* Other carriers are refusing to pay any alternate incentive, and are fighting to preserve the use of contingent commissions.

* Industry experts say there's no real difference between supplemental commissions and contingent compensation.

Commissions: Where Insurance Leaders Stand

Evan Greenberg, president and chief executive officer of Ace Ltd.

19th-largest U.S. property/casualty insurer *

"We look at things very simply: We think an agent's working for the company. Brokers work for the client." Brokers should be paid by their clients. "Otherwise, you are establishing a conflict."

Martin J. Sullivan, president and CEO of American International Group 

Second-largest U.S. property/casualty insurer *

AIG stopped paying contingent commissions in 2004 and has no intention of paying supplemental commissions.

Patrick Gallagher Jr., chairman, president and CEO of Arthur J. Gallagher & Co.

Fourth-largest global insurance broker **

Brokers should ask clients how they'd like to pay for their services.

Joe Plumeri, Willis chairman and chief executive officer

Third-largest global insurance broker **

On April 30, Willis announced it would not be accepting alternate incentive arrangements. "As currently designed, the proposals do not afford a conflict-free environment for the client and we are not going to take them."

* Based on A.M. Best's 2007 Annual U.S. Property/Casualty Financial Results, 12 Months

** Based on A.M. Best Co.'s list of Top Global Insurance Brokers.

Commissions: What Agents Are Saying

The independent agents Steve Zogby has spoken with have been "reasonably positive" about it--both satisfied with the new compensation arrangements made by Travelers and Chubb, as well as current compensation options. "It's really more about disclosure and transparency. We want to be careful about legislation, at least in New York," said Zogby, chairman of the Independent Insurance Agents and Brokers of New York. "That's going to affect this issue, and we're working closely with our officials."

Both standard and nonstandard commissions are "very important" to agents, said Zogby, executive vice president of independent agency Scalzo, Zogby & Wittig Inc. "They allow agents to continue to invest in their businesses and go right toward the bottom line so they can grow their agencies. So, they're extremely important. In our agency, they're very important to us."

And while the percentage of incentive commissions may not be significant, it's extremely important to agencies' profitability. "In our agency, they can be on average 10% to 12%," he said. "That's significant."

"I think it's important that we watch and continue to monitor the situation and make sure that it's fair to agents," Zogby said. "And, we continue to have input going forward on the situation."