Contingent Commissions in Insurance: A Legal and Economic Analysis

Richard Epstein, Apr 19, 2007

This paper gives a brief analysis of the role of contingent commissions in insurance markets. These contracts have received a great deal of attention in recent years because they were the focal point of major criminal enforcement actions that New York´s then-Attorney General, now Governor, Eliot Spitzer, brought against prominent insurance brokers, including the largest three brokers: Marsh & McLennan, Aon, and Willis. Those prosecutions resulted in fines and other sanctions being lodged against these brokerage houses, as well as continuing criminal prosecution against employees who were engaged in some bid-rigging schemes. On balance, a strong case can be made out for requiring disclosure of contingent commissions and for banning any form of bid-rigging. The adverse consequences of nondisclosures are more difficult to track than those for collusion, given the difficulty of showing in individual cases a connection between the nondisclosure and any pecuniary loss sustained by the insured. The case for banning all contingent commissions in the absence of concealment or bid-rigging, still remains not proven. It is not easy to come up with a powerful efficiency explanation for the use of contingent commission agreements, but if these agreements continue to be adopted with full disclosure in the absence of collusion, then it seems premature to ban them just because our incomplete knowledge of how brokerage markets work does not supply a compel…

ACCESS TO THIS ARTICLE IS RESTRICTED TO SUBSCRIBERS

Please sign in or join us
to access premium content!