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The biggest insurance brokers are in negotiations with regulators to reinstate a type of commission banned due to conflict-of-interest concerns.

Regulators are conducting negotiations to revise, or even lift, the 2005 ban on so-called contingent commissions for the three largest brokers. Contingent commissions are paid by insurers to brokers and are based factors such as how much business a broker brings to an insurer and how profitable it is.

"We are sensitive to the need for a level playing field, so companies are treated equally," Connecticut Attorney General Richard Blumenthal said in an interview on Thursday.

Blumenthal was one of the lawmakers involved in an investigation, spearheaded by then New York Attorney General Eliot Spitzer, that led to the ban on the commissions for Aon Corp. (AOC), Marsh & McLennan Cos. (MMC), and Willis Group Holdings Ltd. (WSH).

Spitzer's investigation alleged that some Marsh brokers were rigging bidding to favor certain insurers. Spitzer alleged that this was done to steer business to insurers that paid Marsh big "contingent commissions" payments common in the industry.

Since the ban was instituted, brokers have called for rules that are consistent for all brokers.

Arthur J. Gallagher & Co. (AJG), the fourth largest broker, has succeeded in negotiating an end to its own ban on contingent commissions in October. On a conference call earlier this month, J. Patrick Gallagher, chairman, president and chief executive of Arthur J. Gallagher, described a four-year slog of meetings with staffers of Illinois Attorney General Lisa Madigan over the ban.

"Over the last four years I have been here so often," Gallagher said, "the hostage effect has taken over, we like each other."

Blumenthal said discussions are taking place among himself, the attorneys general of New York and Illinois, regulators and the brokers, over "various options under consideration that level the playing field." Blumenthal predicted a resolution before the end of the year, and said, "We are mindful of the need to protect consumer interests."

Arthur Gallagher estimated that contingent commissions will add $10 million to its annual revenue by 2011. Barclays Capital analyst Jay Gelb estimated in a note Tuesday that the commissions could add an additional $254 million in annual revenue for Marsh, $51 million for Aon, and $40 million for Willis.

Even with the change, brokers probably won't collect as much as they used to from contingent commissions, Gelb said, in part because customers may resist paying the fees.

Marsh collected $845 million in contingent commissions in 2003, out of $11.6 billion in revenue that year.

One step toward relaxing the ban on contingent commissions is a proposal for new commission disclosure rules by the New York State Insurance Department, industry groups say.

Insurance brokers would be required to tell customers whether they represent the purchaser or the insurer in the sale and whether they receive commissions; buyers can request more information.

The Risk and Insurance Management Society, which represents insurance buyers, is generally against contingency fees, and has criticized the move toward transparency rules as being too little to protect customers. "If the broker doesn't have to disclose this information," said Terry Fleming, vice president and director of finance at the society, "then the buyer doesn't get all the information."

Trading was mixed on brokers Friday afternoon, with Marsh & McLennan up 4 cents to $23.86, Willis up 5 cents to $28.13, Arthur Gallagher down 8 cents to $24.18, and Aon down 5 cents to $41.73.

-By Lavonne Kuykendall, Dow Jones Newswires; (312) 750-4141; lavonne.kuykendall@dowjones.com