A commission paid by an insurer or reinsurer to an insurance intermediary
that is based on the profitability of the business that the intermediary placed
with the insurer or reinsurer. In other words, these programs reward intermediaries
for placing a large volume of business likely to suffer lower than average losses
with the insurer (and maintaining that business). The purpose of contingent
commissions is to provide an incentive to place a substantial book of business
with the insurer or reinsurer and provide the insurer or reinsurer with "frontline"
underwriting, administration, and risk control assistance for that book of business.
As they may conflict with representing the best interests of policyholders,
the practice of accepting contingent commissions by insurance brokers was attacked
by the New York Attorney General in 2003–2005 and is no longer a common practice,
at least with the larger firms. On the other hand, since they are the legal
representatives of insurers, independent agents accepting contingent commissions is not viewed as unfavorably and is still commonly practiced. Contingent
commissions are not considered illegal or, given proper disclosure, unethical.
See placement service agreement.