Study Finds Use of Insurer Incentives

A study by one of the nation’s leading consumer advocacy groups has found that incentive fees -- which are at the center of a New York state probe of the commercial insurance industry -- are also used to reward agents for selling individual home and auto insurance policies.

The study by the Consumer Federation of America in Washington found “wide use of troubling contingency fees.”

Author J. Robert Hunter, a former insurance commissioner for Texas, said the incentive commissions, which are over and above regular commissions, “entice agents to do the wrong thing.”

The fees he found included “steering commissions,” which are special payments by insurers to agents to direct more business to the insurer, and “profit-based commissions,” which are paid to agents who sell policies that experience low levels of claims.

“Steering commissions are dangerous for consumers because agents earn more if consumers pay more, which can lead to higher rates,” Hunter said. “Profit-based commissions are more lucrative for agents if consumers have lower losses, which can tempt agents to delay the filing of claims or to discourage consumers from filing claims in the first place.”

Hunter said the report was aimed at making consumers more careful about buying insurance.

“Obviously there are honest agents out there who wouldn’t hurt you,” Hunter told Associated Press. “On the other hand, who expected Marsh & Mac to do what they did?”

He was referring to New York-based Marsh & McLennan Cos. The nation’s largest insurance brokerage was accused last fall by New York Atty. Gen. Eliot Spitzer of bid rigging and price fixing in the sale of property and casualty insurance to business customers. Spitzer also accused Marsh & McLennan of conflict of interest in demanding contingent commissions from insurance companies in exchange for sending more corporate business their way.

Wes Bissett, a senior vice president with the Independent Insurance Agents and Brokers of America, a trade group based in Alexandria, Va., called the allegations in the study “a reckless mischaracterization of independent agents and the manner in which they are compensated.”

Bissett noted that incentive fees were “legal and legitimate in every state in the country.” He was particularly piqued by the suggestion that insurance agents would delay in processing claims.

“No agent is going to sit on a claim,” he said. “That agent would lose that client, and the most important thing is retention of the client.”