All material subject to strictly enforced copyright laws. © 2021 Insurance Insider is part of Euromoney Institutional Investor PLC.
Accessibility | Terms & Conditions | Privacy Policy | Modern Slavery Act | Cookies | Subscription Terms & Conditions

MMC could earn $250mn from contingents return

As US regulatory authorities confirm discussions to "level the playing field" over contingent commissions, it has been estimated that MMC could earn more than $250mn a year if the controversial arrangements are allowed to return.

The decision by the Illinois regulatory authorities in late July - first predicted by The Insurance Insider - to allow AJ Gallagher to again negotiate contingent commissions with its US retail markets has focused attention on the "big three" global brokers. The latter relied on the arrangements for a substantial proportion of their earnings until the campaigning then-New York Attorney General Eliot Spitzer effectively ended them in 2004-05.

If the New York Insurance department - working with regulators in other influential jurisdictions such as Illinois and Connecticut - does repeal the ban, then MMC could be the greatest beneficiary, predicts Barclays Capital analyst Jay Gelb.

Gelb estimates that contingents could be worth $254mn a year to MMC, against $51mn to Aon and $40mn for Willis.

However, he acknowledges that the prediction is an approximate calculation based on a third of what the big three brokers were charging in 2003 - the last full year of contingents. AJ Gallagher, which will begin charging contingents from next month, estimates they will be worth $10mn from 2011 - approximately one-third of the $29mn it earned in 2003.

MMC was the broker most heavily dependent on contingent commissions, earning $845mn in 2003. But the charges were popular among all the large brokers because there were limited, if any, costs associated with them, meaning the revenues effectively dropped through to the bottom line.

The practice attracts criticism because, by being dependent upon triggers such as volume or profit, it can create a conflict of interest. However, some argue that full disclosure can temper these concerns and that proscribing contingents for the three largest brokers gives an unfair advantage to independent competitors.

Gelb says that following discussions with Matthew Gaul, special counsel with the New York Insurance Department, the state is "working towards allowing MMC, AOC [Aon] and WSH [Willis] to accept contingent commissions again after these companies were forced to forfeit contingent commissions in 2004".

Revisions would also have to be made with the large US carriers - American International Group, ACE, Zurich, Chubb, Travelers and Hartford - who have also agreed not to charge them.

However, Gelb continued: "That being said, our sense is that the potential bottom-line benefits of recovering contingent commissions may be less than hoped for. For instance, the insurance brokers may not be able to recoup lost contingent commissions in their entirety if policyholders (customers) resist paying increased compensation, particularly in the recession."

Gelb added: "We remain cautious in our outlook for the insurance brokers because stabilising pricing in commercial P&C and reinsurance could reverse; customers generally do not plan on paying higher broker fees based on the results of our Commercial Insurance Buyers' Survey; and brokers may face increased expenses resulting from dislocation among financially strained insurers."

The analyst also said that, following discussions with Aon and Marsh, both firms are "downplaying the potential upside" from a regulatory rethink. Willis, he also notes, remain opposed to contingents - a high-profile stance that Willis president Joe Plumeri appears reluctant to change.

Willis says that it has already regained around half of the $160mn it was earning in contingents in 2003 through higher upfront commissions. Willis "also historically received another $80mn in service agreements from carriers in the London market, which it does expect to recoup," explained the analyst.

However, it is increasingly likely that there will be an amendment to the so-called Spitzer agreements to level the field between the big three and other US insurance brokers.

"We are sensitive to the need for a level playing field, so companies are treated equally," Connecticut Attorney General Richard Blumenthal said last week.

Blumenthal said discussions are taking place between himself, the attorneys general of New York and Illinois, regulators and brokers over "various options under consideration".

The Connecticut AG even predicted a resolution before the end of the year.

MMC, in particular, has had a good run since the Illinois decision - with its stock up 22 percent since the 29 July announcement - as investors hope that a change in tack from the regulators will improve the firm's earnings potential. At $254mn, says Gelb, this is uncannily close to the 21 percent he estimates it would put on the broker's 2010 earnings per share.

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree