by Bobby Reagan, May 2005

National Underwriter

Once Eliot Spitzer moves onto bigger and better things, which potentially will include the governorship of New York, the impact of his actions will be felt for many years to come within the insurance industry.  Marsh, Aon and Willis are the ones that have been most affected, and will spend the coming months (and years) trying to recover from the settlements, loss of income, damage to their reputation, and the necessity to revamp their operations, as a result.  The impact on the rest of the agency and brokerage community will not be as immediate or as direct.  For the majority of the industry, contingent income is not going to go away.  Some volume-based overrides, or incentives, may not continue, but the bulk of contingent income, from everything that we have seen, will continue to be paid.  It is unlikely that Eliot Spitzer will force restitution on other agents or brokers, either.  With all that said, we firmly believe that Eliot Spitzer is going to have a material impact on the entire agency brokerage system, and it will come through transparency and disclosure requirements. 

Fee based compensation is a fairly common practice for larger accounts written with the public brokers, or larger regional firms.  In spite of that, the vast majority of the property and casualty business written throughout the U.S. is written on a commission basis and agents' and bankers' compensation is rarely, if ever, discussed.  That is about to change - and potentially in a big way.  The push for this is going to come from several directions, including NAIC disclosure requirements, insureds who are going to be more sensitive to the compensation issue and will ask for compensation disclosure, and competitors who will disclose their compensation and challenge insureds to question your compensation.  With all that is going on, the industry is moving toward full disclosure of agency/brokerage compensation. 

Some may not feel that it is that big a deal, but in our opinion, it is going to raise a line of questions that will potentially have a material impact on the relationship between agents and brokers and their insureds.  When the delivery of a proposal or a renewal includes full disclosure of compensation, it is only logical that an insured is going to ask what you are going to do for that compensation - not just what the insurance company is going to do, but what you, the agent or broker, are going to do.  They will want to know how your compensation compares to what others are compensated, and what services you will provide versus the services provided by your competition.  In addition, they are going to want to know what the relationship is between your compensation and the total premiums they pay.  "If you lower your compensation, will their premium be reduced by the same amount, or potentially more?" 

All of this would suggest that agents and brokers better be prepared to respond to challenges to their compensation and the services that are provided for that compensation.  This is obviously going to come directly from your insureds, but will also be fueled by your competitors.  You can be assured that there are some agents that will be open to write the business at lower compensation.  There are some agents and brokers who are able to provide broader services than you provide or they are better at communicating what they do.  If this is the case, the producers in your organization are going to have to be better equipped to sell the services provided by your organization and the value of those services.  It is also going to require that you take a hard look at the breadth and depth of the services that are provided.  You better make sure that you are in a position to provide a level of services that is at least comparable, if not better, than your competition and that it is a level of service that justifies the compensation that you are receiving.

The implication of transparency and full disclosure of compensation should not be taken lightly.  For agents and brokers that do not prepare their production staff to explain and defend their compensation or for those that are not providing a competitive level of services, "Spitzer's lasting legacy" is going to be a problem.  For the more professional agents and those that provide a better value proposition, full disclosure of compensation has the potential of shedding light on their "value proposition" and giving them a competitive advantage.

This once again illustrates that good things can come out of negative circumstances if there is an appropriate response.  You want to make sure that your response is appropriate.

Bobby Reagan is the President and CEO of Reagan Consulting, an Atlanta-based financial and management consulting working with insurance agents, brokers and financial institutions.  Bobby may be reached at bobby@reaganconsulting.com.