Dont Let Broker Probe Hinder Needed Reform

New York Attorney General Eliot Spitzers criticism of theinsurance industry took on a new dimension recently when hepublicly declared his intention to run for governor of NewYork.

Many observers have suspected that Mr. Spitzersmotivationstogether with his choice of high-profile targetsemblematic of Wall Streetare part of a calculated strategy to curryfavor with the Main Street voters whose support he would need in afuture run for office.

After all, using a states chief law enforcement office as aspringboard to the governors mansion is a well-established routeused by both Bill Clinton and John Ashcroft before being elected tothe top office in their states. Its common enough that those whowork around state government joke that “AG”shorthand for attorneygeneralactually stands for “Aspiring Governor.”

Mr. Spitzers current campaign against the insurance industry andhis outrageous comments comparing the industry to organized crimeare consistent with that strategy, in spite of the fact thatAmericas diverse network of insurers, agents and brokers is morerepresentative of Main Street than of Wall Street.

There is considerable irony in the Spitzer-induced agitationover broker compensation. According to Mr. Spitzer and hissupporters, contingent commission arrangements prevent unwittingconsumers from obtaining the best available policy at the bestpossible price.

Their wholesale condemnation of contingent commissions hastypically been accompanied by expressions of outrage over the“failure” of the insurance regulatory system to protect consumersfrom practices that may have caused some consumers to pay more forinsurance coverage than they should have.

In fact, many requirements of the insurance regulatory systemhave been having that effect for years, yet few of those up in armsover broker compensation seem to notice or care.

The most glaring examples are rate regulation andgovernment-imposed underwriting restrictions, which force low-riskconsumers to subsidize the cost of providing coverage for thosewith higher levels of risk. Given the current enthusiasm fordisclosure and transparency, perhaps regulators should disclose thesurcharge that these cross-subsidies impose on low-riskpolicyholders.

There is also a vast array of price-inflationary regulatorypracticesranging from gratuitous market conduct examinations, toburdensome rate and form filings, to the lack of uniformity amongstates with respect to routine administrative requirements. Theserules and procedures generate enormous compliance costs forinsurers that are ultimately borne by consumers in the form ofhigher premiums.

In addition, if the questionable practices of a few commercialbrokers have driven up insurance costs for some consumers, considerthe tort litigation systems devastating effect on the priceconsumers pay for various forms of liability insurance.

In the broad scheme of things, the negative impact on consumerswrought by these regulatory and legal requirements far outweighsthe few instances of bid-rigging and possible contingent fee abusethat have become the cause du jour among someeditorialists and consumerists.

That is why the National Association of Mutual InsuranceCompanies has renewed its support for a modernized system of stateinsurance regulation that protects consumers, creates uniformity,ensures competitive markets and encourages choices for theinsurance-buying public. We have urged reform-minded policymakersto remain steadfast in their support of a state-based modernizationagenda.

We know that wont be easy, because already the Spitzer probe hascaused some to question certain elements of the modernizationagenda. For example:

Rate modernization:

Unfettered price competition is the lynchpin of meaningfulregulatory reform. Opponents of price competition have used theSpitzer allegations to suggest that if rating for commercial lineshad not been deregulated, regulators would have been in a positionto detect instances of bid-rigging.

However, the potential for bid-rigging exists across a widerange of industries. Only in insurance regulatory circles wouldanyone seriously suggest that the way to deter such criminalactivity is through government-administered price controls.

State vs. Federal Regulation:

Proponents of an increased federal role in insurance regulationwill no doubt cite the Spitzer allegations as proof of theinadequacy of state regulation. But lets not forget that the mostnotorious corporate scandals in recent decades have involvedindustries that operate under federal regulatory jurisdiction.

The savings and loan debacle of the 1980s and the more recentscandals involving the energy industry are hardly testaments to theeffectiveness of federal regulation. Moreover, the targets of Mr.Spitzers own past prosecutionsinvestment banks, pharmaceuticalmanufacturers and mutual fund companiesare all subject to federallaw and regulated by federal agencies.

Competition:

With respect to both pricing and underwriting, NAMIC has longstood for the proposition that open competition spurs insurers toprovide the most innovative products and services at the fairestprice for consumers. Bid-rigging clearly involves illegal collusionamong competitors and merits appropriate penalties andsanctions.

Regarding contingent compensation arrangements, a rule requiringinsurance brokers to clearly disclose to prospective customerswhether they represent the customer, an insurer or both, wouldallow customers to evaluate potential conflicts of interest whenchoosing a broker. The transparency created by such a rule wouldenhance competition and therefore benefit consumers.

However, a proposed amendment to the National Association ofInsurance Commissioners Producer Licensing Model Act would requirea level of disclosure that is unreasonable. Producers (whichincludes both brokers and agents) who receive compensation fromboth policyholders and insurers would have to disclose the amountof any compensation from an insurer, describe the method forcalculating that compensation, and provide an estimate of theamount of compensation if it is not known at the time ofdisclosure.

Further, the amendment would require producers who receivecompensation from an insurer to disclose whether the compensationwill vary depending on the product and the insurer, and alsowhether it will vary based on factors such as the premium volumeplaced with the insurer or the insurers claims experience. Does theNAIC really believe that consumers need this level of mandatorydisclosure to make informed choices?

The NAICs overzealous response to the Spitzer probe comes aspowerful interests in Washington are lobbying in support of a dualsystem of state and federal regulation. To maintain the statesexclusive prerogative to regulate insurance, the NAIC and statepolicymakers must re-dedicate themselves to the modernizationagenda that NAMIC has supported for years.

Most importantly, the state regulatory system must give up itsinfatuation with antiquated rate regulation. Using the Spitzerprobe as an excuse to create additional layers of regulationignores the real problems that must be addressed.

Charles M. Chamness is president and CEO of the NationalAssociation of Mutual Insurance Companies in Indianapolis.

Reproduced from National Underwriter Edition, December 16, 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.