Connecticut Jumps On Fee Probe Bandwagon

Survey reveals risk manager concern, as over two-thirdscite conflict of interest

Connecticut is joining the investigation into producercontingency fees at the same time a new survey shows risk managersare not happy with the side deals struck between brokers andinsurers.

Connecticut State Attorney General Richard Blumenthal said he islooking into contingency fee arrangements after receivingcomplaints from risk managers in the state. According to TheNew York Times, Mr. Blumenthal's investigation began aroundthe same time New York and California launched their probes. Hesaid he has been in touch with investigators in those states on theissue.

A representative for the Connecticut Insurance Department saidInsurance Commissioner Susan Cogswell would be meeting with Mr.Blumenthal to discuss his concerns about contingency fees. Noadditional comment would be available until after the meeting, shesaid. Mr. Blumenthal did not return a request from NationalUnderwriter for an interview.

New York State Attorney General Eliot Spitzer has subpoenaedrecords of Aon, Marsh, Willis and Kaye Group, a subsidiary of HubInternational, as well as Chubb Insurance and perhaps others in hisprobe of contingency fee arrangements. In California, the insurancedepartment confirmed it is also looking into the practice. All havesaid they are cooperating in the investigations.

On top of these probes, a New York attorney has filed a suit inCalifornia against major insurers for paying “bribes and kickbacks”to small brokers to secure their business. The attorney, FinleyHarckham, a partner in the New York law firm of Anderson Kill &Olick, said he has been contacted by some regulators concerning thesuits, which target Allianz, American International Group, Chubb,the Hartford, and others.

Contingency fees are paid by insurers to brokers, based eitheron the performance of their book of business or the premium volumethey generate. The practice, critics suggest, could lead brokers tosteer business to the insurer paying the best fees and not becauseit offers the best deal to the insured.

The fees remain a sore point with risk managers. A survey byAdvisen, Ltd. of 330 risk managers found that 69 percent believethe fees (also known as placement service agreements) represent aconflict of interest. Less than 20 percent said they receiveadequate disclosure of such fees, while 56 percent believe brokersare not disclosing the fees in all cases.

“The survey indicates that there are a large number of riskmanagers who are unhappy with the quality of disclosures,”commented Dave Bradford, executive vice president at Advisen, a NewYork-based consulting firm that works with the Risk and InsuranceManagement Society on its “Benchmark Survey.”

RIMS President Nancy Chambers said the issue has remained “onthe radar screen” of risk managers since it came up in the late1990s, when the New York-based corporate insurance buyers group putout a position paper on transparency in broker compensation. Mr.Spitzers investigation has heightened interest in the subject forrisk managers, which she said the Advisen survey confirms.

In light of this continued interest, RIMS decided to puttogether a task force back in April to reexamine its position onbroker compensation and see if any update is needed, she said. Nodeadline has been set to issue a report and interim recommendationsexpected last week were not yet ready, Ms. Chambers explained. Sheadded that the report needs to be completed in the near future inlight of the questions being asked today by regulators andattorneys general.

“Given the discussions recently in the media, as well as in our[online] e-group, there is a need to make sure our position ontransparency is the most appropriate one and represents ourmembers' needs and their positions,” said Ms. Chambers, who is therisk manager with the Waterloo Region Municipalities Insurance Poolin Kitchener, Ontario, Canada.

The seemingly sudden interest in contingency fees by prosecutorswas prompted by the mutual fund scandal, according to Robert A.Rusbuldt, chief executive officer for the Alexandria, Va.-basedIndependent Insurance Agents & Brokers of America. He saidcomplaints about the lack of transparency and disclosure of feeshas drawn the attention of state attorneys general.

“Some attorneys general offices are drawing a parallel to theinsurance industry, which I think is a false assumption,” said Mr.Rusbuldt. “They believe disclosure was not proper, or there was notenough disclosure, or the contingency fee structure was notappropriate. I think they will quickly find out sales incentiveprograms, based on profitability and volume, happen in everyindustry in America.”

Brokers are disclosing the fees, he continued, and they aredealing with sophisticated buyers who understand such arrangements.If the fees were not disclosed, he added, he could understand whythere would be a problem. “I think right now they are in theinvestigative mode; the brokers and insurers are cooperatingmy onlyquestion is once they have the information, what are they going todo with it?” he said.

Mr. Rusbuldt said he hoped politics does not take over theinvestigation. “If they look at the facts,” he remarked, “theyshould conclude there is no issue here.”

Reproduced from National Underwriter Edition, May 28, 2004.Copyright 2004 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.