Contingent commission

In October 2004 New York Attorney General Eliot Spitzer sued Marsh over contingent commissions and sham quotes; the January 2005 settlement cost the broker $850 million paid back to clients. A contingent commission is paid by the insurer to the broker on the overall performance of the book placed, volume, profitability or renewal rate, rather than contract by contract. It is economically defensible, since it rewards a quality of selection that benefits both sides. It also sets up a structural conflict of interest, the broker being the policyholder's agent while paid by the insurer on criteria the policyholder does not know. The conflict becomes a breach once placement stops following the client's interest. The answer was disclosure rather than prohibition. The large brokers gave these commissions up in 2005, then the New York agreements were amended in 2010 and the practice came back. In Europe, Article 19 of the Insurance Distribution Directive requires the client to be told the nature of the remuneration. Disclosure a client does not read corrects no conflict, and conduct regulators now look at the value actually delivered.