UCONN Law School's Sean Fitzpatrick argues that contingent commissions for insurance agents have been used for a century because they are effective and efficient, and good for consumers as well as the insurance industry. His Fordham Law Review article, published in SSRN, reviews the recent investigations by Eliot Spitzer and the limited legislative response in states. He also provides a useful primer on the history and economics of the business of insurance.
He touches on theories introduced in one of his earlier articles that perverse incentives internal to insurance broker and company organizations may have led to the serious malfeasance acknowledged by several national brokerages and insurance companies. Explorations of such perverse incentives may also be of interest to students of public choice theory, the recurring failure of governments to respond to impending disasters such as hurricanes, earthquakes or global warming, and the general challenges of external costs in complex systems subject to "the tragedy of the commons." Fitzpatrick's views were addressed in more detail in "Fear is the Key: A Behavioral Guide to Underwriting Cycles," 10 Conn.Ins.L.J. 255 (2003-2004), which can also be found on SSRN at http://papers.ssrn.com/abstract=690316 and was briefly summarized in an earlier posting in this place: Unintended Consequences: Lloyd's Boss Prays for Insurance Underwriting Profit (April 9, 2005).
Fitzpatrick argues that banning contingent commissions could have the unintended consequence of hurting the competitiveness of small, local, independent insurance agents and driving increased consolidation into large, national brokerage houses like Marsh and Aon. He closes with a practical suggestion for a requirement of disclosure of contingent commissions comparable to that found in the real estate industry. SSRN-The Small Laws: Eliot Spitzer and the Way to Insurance Market Reform, Sean Fitzpatrick, University of Connecticut School of Law, Fordham Law Review, Vol. 74, pp. 3041-71, 2006.
Thanks for the tip about this new article to Specialty Insurance Blog: Contingent Compensation (May 26, 2006).
Posted by dougsimpson at May 27, 2006 07:14 AM