New York's New Compensation Rules: Good News for Brokers

(MoneyWatch)  News that New York Insurance Superintendent James Wrynn will finalize rules on broker compensation on Feb. 10 could be construed as good news for at least two of the major insurance brokers, Marsh & McLennan Companies and Aon Corp.

The current situation created a two-tiered playing field when former New York Attorney General Eliot Spitzer slammed the big brokers with fines up to $850 million for what he termed backdoor deals with insurers. Brokers were selling insurance to businesses while at the same time taking money from insurers to promote their products; a clear conflict of interest, at least from Spitzer's point of view.

Marsh, Aon and Willis Group Holdings, the third largest broker, agreed to forgo these "contingent commissions," but smaller brokers did not. Consequently they made more money because they still earned it from both sides.

Regulators, such as former New York Insurance Superintendent Eric Dinallo, have softened their stance on whether brokers should take money from insurers - as long as it is disclosed - while insurers continued to find novel, but legal, ways to give it to them. Why penalize brokers when other industries, like supermarkets and bookstores, make deals for shelf space and positioning with food suppliers and publishers?

Wrynn agrees, but has acted cautiously in determining just how much a broker should disclose, and whether a customer has to ask for it in order to find out. After all, these deals represent competitive information that other brokers would probably like to know.

According to the National Underwriter, Wrynn's made up his mind and will meet with the Independent Insurance Agents & Brokers of New York Inc. on Feb. 9, but won't disclose the rules until the following day. And not a bit too soon, either, since the IIABNY has threatened to sue the state insurance department.

Insurance is a state-run system and since many insurers are based in the Empire State, New York is the place most insurers look to for rulemaking. Lenient rules could enable Marsh and Aon to get back on a more even footing with their smaller competitors. But Willis Group CEO Joseph Plumeri says he won't take contingent commission no matter what.