How to meet the challenges of the contingencies controversy.
Change — it’s inevitable. A recent article stated that “change is not progress; change is the price we pay for progress.” As consumers, we all want more, better, less costly stuff than we have today. As providers of products and services, we feel that we’re already doing more with less and shouldn’t be expected to sacrifice again. Maxine, the cartoon character, summed it up best when she said, “change is good, as long as I can do what I’ve always done.”
Since early October of 2004, a tsunami of change has blown through our industry. New York Attorney General Elliott Spitzer started the ball rolling with his investigation of Marsh. California Insurance Commissioner John Garamendi accelerated the pace by calling for full disclosure of commissions, and dozens of trial lawyers have exacerbated the problem by filing a series of class-action lawsuits against the insurance industry and its distribution channels.
In the past, an industry with the size and clout of financial services would have fought the process or lobbied it away in the halls of Congress. Today in the shadow of Enron, the collapse of Arthur Andersen, Martha Stewart in jail, and a consuming public that’s “mad as hell and won’t take it anymore,” the industry has lost its “mojo.”
Regulators, consumer groups, prosecutors, and plaintiff attorneys have smelled blood in the water and are in a feeding frenzy. They’ll do their best to “clean up this industry once and for all.” The system will reshape itself too rapidly to allow the benefactors of the past (the carriers and their distribution channels) to defend themselves, mitigate the political damages, and/or prepare themselves properly for the new day that will be arriving very, very soon.
Independent agents, who have correctly and successfully positioned themselves as consumer advocates (“we represent the customer”) will now come under attack for the first time. The problem facing agents is that the structure of our compensation will change — and the nature of the investigation into our revenue sources will damage our credibility even if we’re innocent.
For example, let’s say that Ms. Client has a great, honest, and professional agent named Tom, who has always worked in the best interests of his customers, even when this might be against his own short-term need. Tom has promised and delivered integrity and full disclosure to Ms. Client. He negotiates his fees and commission structure with her once a year.
Yesterday Ms. Client reads a Wall Street Journal article on Marsh. She calls Tom and asks, “Tom, I’m embarrassed to ask because you’ve always been so honest with me and you’re the best agent I’ve ever had. We agreed that you would always fully disclose your compensation on my account. Did you see that article in the WSJ? Do you get any of those contingency payments mentioned? Were these payments included in your disclosures?”
Tom (ever honest) must answer, “Yes. I did get contingencies,” and, “no, I didn’t disclose them.” However, his explanation might come too late because the contingency agreement compromised his “independence” and damaged the “trust” that is his calling card. Tom can explain away the problem but he can’t bring back the relationship as it was.
THE BAD NEWS
Many insurance companies are rapidly pulling back from contingency contracts because of the legal risk involved (not to mention the cost savings) and moving to full disclosure of commissions, or quoting net of commissions.
Customers will demand an explanation of all options (cost and coverage) available and why the agent is recommending a particular product and carrier. The days of “renew as is” will soon be history. This will create significant administrative burdens and make your newly disclosed contingency commissions a valid negotiating point.
Agents who have built their reputation on price-selling (“I’ll beat your current price by 10%.”) will now have to compete on their commission level, pricing themselves out of business in the long run.
THE GOOD NEWS
After a year or two long bloodbath, the survivors will create a new professional fee-based compensation that demands and deserves respect. Agents will move up in the inner circle of client advisors with CPAs and attorneys.
If you’re already a good and efficient agent, your future is bright. If you’re not, you face a serious challenge — that’s another word for “opportunity.”
Either way, you’ll need new glass doors on your bathroom!