NAIC Struggles Over Broker Fee Law

By Steve Tuckey

NU Online News Service, Dec. 6, 9 :01 p.m. EST,New Orleans?Insurance regulators remained sharplydivided today on how extensive to make provisions of a model lawconcerning controversial broker fees.[@@]

The divisions surfaced here in a second round of discussionsabout the model legislation that has been developed to deal withfindings from New York's broker compensation investigation. Thatprobe has led to a civil suit alleging that Marsh broker fees andcommissions included payoffs from insurers involved in aprice-fixing scheme.

Under discussion is an amendment to the National Association ofInsurance Commissioners' model law regulating producers. Theproposed measure, in part, would require more disclosure ofcompensation sources. Previous discussions were held Saturday.

Despite the conflicts, regulators at the NAIC session said theyare still intent on crafting a compromise measure in time forapproval before Christmas, so it can be included next year on statelegislative agendas.

Montana Commissioner John Morrison commenting on the proposalsaid corruption and fee transparency were two different issues. "Solet us deal with the issue of corruption that is threatening thereputation of the NAIC and the industry itself."

But consumer representatives and other regulators wanted a moreexpansive look at compensation reflected in the model.

Last October, New York Attorney General Eliot Spitzer filed alawsuit against Marsh brokerage alleging bid rigging and otheranti-trust violations. While not directly related, it was disclosedthat the brokerage received an estimated $800 million incontingency fees from carriers based on the amount of business itsteered to the carriers.

Although industry trade groups claimed such fees were legitimateand have always been disclosed, the major insurers announced theywill stop paying them, and Marsh and Aon said they would no longeraccept them.

At the regularly scheduled public hearing Saturday, regulatorsclashed on how endemic the wrongdoing was in the industry.

Gary Cohen, California Insurance Department general counselsuggested the NAIC was slow to react to the problem. Whileasserting disclosure was not enough, he was not specific as toother measures that should be taken.

Today's session to better reach a consensus was scheduled afterrumors of sharp exchange Sunday between California CommissionerJohn Garamendi and NAIC president Diane Koken, during a closed doorCommissioners Roundtable.

The revised model is divided in two sections, A and B, dealingwith brokers and agents respectively.

But defining the scope and duties of the two areas, and theamount of disclosure needed for each took up most of the specialsession today.

While brokers are for the most part compensated on a fee basisby the prospective policyholder, and agents by the carrier, thereare enough exceptions to make an inclusive definition almostmeaningless.

Audrey Samers, New York Insurance Department general counsel,said many of the brokers under investigation in her state arecompensated only by the carriers and she leaned toward includingboth parties in the disclosure requirement.

But she faced the efforts of Mr. Morrison and Georgia InsuranceCommissioner John Oxendine who wanted to limit this model tobrokers in Section A and work on the other issues sometime throughthe year.

Since policyholder compensation was too limiting a definitionfor the broker disclosure, regulators considered using a test of"acting on behalf of the client" as defining the broker role.

But William Anderson, representing the National Association ofInsurance and Financial Advisors, said any resulting need for hismembers to disclaim their actions on behalf of their clients couldresult in losing sales.

"Well, if that is the case then I think you should all beincluded in it," said Mr. Oxendine.

Wes Bissett, speaking for the Independent Insurance Agents andBrokers of America, said perhaps different levels of disclosurecould be required for the two groups, but only after a sharpdelineation was made.

Since brokers don't receive carrier appointments, that wassuggested as a defining feature.

Mr. Morrison suggested adding the phrase "in the best interestof" to a definition for broker as is proposed in the model putforth by the National Conference of Insurance Legislators. But suchphrasing would impose a fiduciary duty on brokers that does notexist in a general sense, it was noted by Mr. Cohen ofCalifornia.

Industry representatives note that with an estimated 3.500carriers acting "in the best of interest of" can be nearlyimpossible to quantify, since price is merely one small piece ofthe puzzle in the complex world of commercial insurance.

The trade group representatives argue that adding complexity toa new and allegedly fuzzy disclosure requirement will be aninvitation for lawsuits.

It also remained unclear whether the National Council ofInsurance Legislators would water down its more stringent brokerfee proposal to be able to back the NAIC measure, as it did with amarket conduct model law.

NCOIL President Craig Eiland said he would have to wait untilnext week to see what document finally emerges before speculatingon that possibility.

Regulators must also grapple with what form of acknowledgementthe disclosure will require and also how much should be disclosed.The current draft calls for the exact dollar amount. But that wouldnot be available for contingency fees. Regulators expect to takecomments on the revised model by Thursday and will have aconference call to approve a measure at the end of next week orearly in the following one.