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Issue 111 - 23rd July 2010

• Aon courts contingent commission controversy
• German Ambassador urges caution on US tax proposal
• Quinn appeal loss will not leave solicitors in the lurch
  

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Aon courts contingent commission controversy

It might be what can be deemed as the quiet season for the insurance market but the announcement by Aon that it would consider contingent commissions in areas where they are legally allowed and are revealed to the client has prompted some heated statements from rival brokers and risk managers. It all started with a statement from Aon Risk solutions Chairman and CEO Steve McGill on the issue. He said  “As we stated during testimony delivered in July 2008 to the New York State Insurance Department and Office of the Attorney General, Aon is committed to industry-leading transparency and delivering the highest value for price in the industry on behalf of our clients. We have conducted a great deal of research around broker compensation across the globe with a focus on serving the needs of our clients and competing on a level playing field in the marketplace.  As a result, we have decided to accept various forms of compensation available, which may include supplemental and/or contingent commissions in the geographies and client segments globally where appropriate and legally permissible.” He added: “Our firm’s focus has been and will always be on doing what is right to serve the best interests of our clients, and delivering the industry’s finest products, services and capabilities through the development of innovative solutions.” Given that US risk management association RIMS had the issue of contingent commissions on the agenda for their Annual Conference in Boston this year there was little surprise that once the statement was issued they would have something to say. It expressed it’s “disappointment” at the announcement. “RIMS urges Aon to join other large brokers in agreeing not to accept contingent commissions,” said Scott Clark, RIMS secretary and director of RIMS External Affairs Committee. .“Ultimately, we would like to see the insurance industry as a whole adopt practices that place the broker in a position that best serves purchasers of insurance.”  It statement added: “RIMS has always maintained the position that contingent commissions should be universally banned and views Aon’s intentions as a step backwards with regard to the level of service it provides to its clients. RIMS will continue to call upon all brokers to refrain from accepting contingent commissions, as they pose an inherent conflict of interest and interfere with the relationship of trust between the broker and insurance consumer, regardless of the nature of the client or the intermediary. RIMS will continue to work closely with all parties on the issues of producer compensation and disclosure.” Broker Willis and its Chairman and CEO Joe Plumeri have been public critics of the use of contingent commissions and have pledged never to use them again.  It launched a hard-hitting statement over the announcement. “With Aon retreating to a troublesome and ambiguous position on contingent commissions, Willis now stands as the world’s only insurance broker to refuse to accept contingents in its retail business,” it said. “ Aon’s overdue and muted announcement, floated in mid-summer, should come as a wake-up call to all risk managers and buyers of insurance to re-evaluate whether their broker really works for them, or the insurance carrier.  Offering opaque statements about doing what is “legally permissible,” another competitor has opted to put contingents before principle.  Willis puts clients before contingents. What buyer of insurance would take comfort in their broker adopting a minimum standard of what’s “legally permissible” to define their relationship?  Who is really convinced that taking back door payments from carriers at the end of a year based on profitability and growth of a book of business is an example of, as Aon’s Steve McGill says in the company’s news release, “doing what is right to serve the best interests of our clients”?  Clients’ best interests are served when their brokers work for them, and only them, with standards of service based on ethics and integrity, not merely on what’s “legally permissible”.” Willis said its stand is “unwavering” on the matter.  It looks set to be a tough summer as the issue is now in the spotlight once again and the debate is sure to continue.


German Ambassador urges caution on US tax proposal

The Dodd Frank Act which will revise the US Surplus Lines market has been welcomed by insurers and brokers alike this week as it headed for the final presidential signature, however the German government has not been as welcoming to the proposal by Democrat Republican  Representative Richard Neal’s to revamp the taxation system for insurers and reinsurers which shift premium income offshore. In a nutshell the proposal would see the US able to deny tax deductions on premiums moved to another jurisdiction if they hit a certain level.  He believes that if such a proposal was to come into law it would generate $15 billion for the US treasury a sum and a sound bytes which is winning hearts and minds amongst fellow politicians in a time of economic cutbacks. However it has prompted an open letter form the German Ambassador to the US Klaus Scharioth who has hinted that such a move would be in breach of the US-German agreement on trade. "It goes without saying that the German Government recognizes the U.S. Government's right to combat tax avoidance and evasion," he wrote. "But it is our view that the proposed legislation goes well beyond this objective and, as a result, will be in conflict with provisions of the German-U.S. tax treaty." There is also a hint that such a move would breach the World Trade Organisation’s (WTO) guiding principles and as such the ambassador  asks the US Congress to take the views into account during any discussion over the proposal.

Quinn appeal loss will not leave solicitors in the lurch

There has been much said about the ramifications of the recent UK Appeal Court ruling against the UK arm of the Irish insurance group Quinn Insurance who has sought access to files from one of its Solicitors’ PI policyholders. The firm has been investigated for fraud and Quinn has refused to cover one of the firm's partners and was seeking access to file son the other partner to see if they had been in any way involved in the alleged fraudulent behaviour. The files had been seized by the law society who refused the insurer access because there were client confidentiality  issues. Quinn lost its first attempt to gain access via the High Court and the Court of appeal had backed the decisions. Warning had been issued that Solicitors’ Professional Indemnity rates would rise significantly during the annual October renewal because of the ruling but broker Marsh has said that will not be the case. Sandra Neilson-Moore, Marsh’s European Practice Leader for law firms’ PI said the market was well aware of the issues of client confidentiality and the fact that insurers were not in the “circled of confidentiality” which exists between the solicitors and their client. “It is something that the market will find a way to work around as it always has,” she added. “ There has always been a situation with law firms where certain things have been confidential and the law firm has communicated with their insure to say there is an issue details cannot be made know at present but the firm has sought to put the underwriter on notice as bets they can.” She added that it is not the Court of Appeal decision which will push premiums up in October but the rising numbers of law firms which have been forced to enter the industry’s Assigned Risks Pool (ARP) an insurer-funded pool for firms which have been unable to secure commercial  insurance cover. In recent years the level of claims in the pool have increased significantly with some insurers now informing their clients that they will need to charge a levy specifically for the ARP funding at renewal. The market is already being hit by court cases from lenders in the property sector over the sub-prime mortgage crisis and the rise in lean defaults following the credit crunch. “The lenders had a number of other issues to think about two years ago when the crisis first arose but they are now turning their attention to who they can sue over their loses.” she added.

Jon Guy
Editor
Global Broker & Underwriter

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