As everyone knows by now, megabroker Arthur J. Gallagher has received the blessing of Illinois regulators to resume the practice of collecting contingent commissions nationwide starting in October, a move that’s expected to generate more than $10 million in earnings.

The practice, eliminated in 2004 as part of the fallout of a major investigation by former New York AG Eliot Spitzer, hit AJG, M&M, Aon and Willis and caused a major ruckus in the industry, especially among the industry’s biggest brokers and insurers, who are still smarting from billion-dollar fines and lost revenues.

And AJG’s decision has observers speculating on whether the other big brokers will try to follow Gallagher’s lead to get contingent commissions reinstated.

Not everyone is pleased with the news. Yesterday RIMS issued a statement expressing “disappointment” with the move, reiterating its belief that incentive commissions are an inherent conflict of interest, even though Gallagher vows to practice full transparency in the process.

The controversy harkens back to the original discussion of whether or not any sort of commissions, incentives or whatever you want to call them are a conflict of interest — whether it’s for placing insurance or selling cars. Any sales-based culture uses volume requirements and profitability goals as incentives for its producers to sell more. The rub lies in whether or not the customer knows or cares about what goes on behind the scenes.

We’ve all learned a lot since 2004. Transparency is now the mantra, not just for insurance, but every other business, especially with the hot spotlight on government oversight of financial services. You can be sure that in today’s hypersensitive business environment, any practice that smacks of collusion will be scrutinized, vilified and quashed — and rightly so.

It should be interesting to see whether AJG’s decision will generate any backlash from those outside the industry — or if yesterday’s atonements and adjustments have paved the way for a more lenient view of a practice that, when done ethically, is just part of a sales culture.

Eliot Spitzer’s star has risen and set, but his legacy lives on, at least when it comes to the issue of contingent commissions in the insurance industry.

This week, New York Insurance Superintendent Eric Dinallo and AG Andrew Cuomo started hearings in Buffalo on broker compensation, with two more hearings scheduled for later this month in Albany and Manhattan.

First out of the box to testify was Willis CEO Don Bailey, who stated that contingent commissions should be gradually phased out, with full transparency mandated for all insurance brokers.

Back in the day, agents and brokers relied on contingent commissions as a way to bolster revenue losses after carriers cut regular commissions because of inflation. Over the years, though, contingent commissions have developed an unsavory reputation because of the unfortunate misconduct of the sneaky and the greedy.

Insurers have defended the practice, saying that everyone in any form of sales is entitled to some form of commissions, and that the practice is ethical as long as the buyer is informed of the arrangement and that transparency is maintained. In a lot of cases, compliance involved a lot of voluminous paperwork and red tape, for both the carrier and the producer.

The question remains, what does all this mean to the actual insurance customer? Some say that insureds aren’t aware of the arrangement or if they are, really don’t care all that much, as long as they get the coverage they need at a fair and competitive price.

I’d like to throw the question out to AAB readers: What’s been your experience with coaching your customers about the contingent commission issue — and do they care? And how much of a hit will your agency revenues take if they’re phased out entirely?

Please feel free to share your thoughts!