Contingent commissions

Contingent Commissions is a term used in the insurance industry for any kind of broker's commission which is contingent upon some event occurring (instead of a commission paid on the sale itself).

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Theoretically, this term could apply to any type of brokerage industry, although most do not feature these types of payments. Contingent commissions could be used to prevent a conflict of interest between the wholesaler and the broker, if the broker would otherwise have an incentive to provide the wholesalers with a large number of bad customers. An example from the mortgage brokerage industry would be if the brokers' commission depends on the borrower continuing to repay the loan, rather than being paid in a lump-sum when the loan is issued.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

In practice, contingent commissions paid by insurance companies to brokers have typically been contingent on the broker steering a certain amount of business towards the insurance company, and have not been contingent on a particular buyer's behavior.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Criticism of contingent commissions arise when they are structured so that the wholesalers compete (among brokers) on the fee paid to the broker rather than the price to the buyer. This creates a conflict of interest for the broker to deceive the customer into picking a higher priced product. Another criticism is that the full brokerage commission is not necessarily disclosed to the buyer, who therefore has less knowledge of the broker's incentives.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

In 2004 Eliot Spitzer led an attack on the contingent commission practices in the insurance industry. The attack was not so much on the practice in and of itself, but on the allegations that the insurance underwriters had an oligopoly agreement between each other (not at will but caused by the immense influence of the largest brokers) to submit false prices to stifle real competition.

Related Topics:
2004 - Eliot Spitzer

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

In 2005 insurance brokerage Arthur J. Gallagher & Co. agreed to a $27 million settlement with the Illinois Attorney General with regard to accepting contingent commissions and decided to end the practice of collecting contingent commissions within the company. Other settlements following similar investigation include Marsh, Aon, and Willis.

Related Topics:
2005 - Arthur J. Gallagher & Co. - Marsh - Aon - Willis

~ ~ ~ ~ ~ ~ ~ ~ ~ ~