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Regulatory Sunlight for Insurance Brokers

(TORONTO STAR) - News comes today that the largest publicly traded insurance brokerage organizations–Marsh & McLennan Companies MMC , Aon AON , and Willis Group WSH –have reached “restated agreements” with various state regulatory authorities allowing them to take contingent commissions, a practice that had been banned since 2005. This news follows on the heels of Arthur J. Gallagher’s AJG 2009 agreement winning over Illinois authorities to that position. We’ve been expecting some rationalization of regulatory practice along these lines.

Contingent commissions compensate brokers for the profit and/or volume of business placed with an insurance company. On the face of it, these arrangements can clearly be abused. But they originated as a market incentive for brokers to take a stake in controlling losses facing insurers and can also work to align the interests of clients, intermediaries, and insurance companies.

The 2005 agreements led to a skewed market outcome as the vast majority of the intermediaries in this fragmented market were allowed to keep taking contingents while the larger firms were operating under the bans. Over time, insurance companies developed alternative ways of rewarding (or penalizing) firms operating under the ban, including base commission rate changes and “supplemental” commissions.

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