N.Y. A.G. Investigating Broker's Fees

By Mark E. Ruquet and Daniel Hays

NU Online News Service, April 23, 3:37 p.m. EDT?New York State Attorney General Eliot Spitzer's office has subpoenaed three major insurance brokers in a probe of a fee practice that a consumer group has charged could inappropriately jack up customers' costs and reduce their benefits.[@@]

At issue are the millions in contingent commissions that insurers pay brokers in special arrangements that critics say could mean customers are not directed to carriers who give them the best deal.

A brokers' group representative said there was no conflict in the agreements at issue.

The investigation was revealed when the Aon, Marsh and Willis brokerages announced they had received the subpoenas.

A representative for Mr. Spitzer said the attorney general could not comment.

Two months ago, the AG's office received a letter from the Washington Legal Foundation, which was sent to the California Attorney General's Office as well, asking for an investigation and action on what the group described as a potentially "damaging practice."

The non-profit Washington, D.C.-based WLF said then that the contingent agreements--which they also called profit sharing and placement service agreements--"compromise a broker's duty to the client's best interest by encouraging brokers to refer business only to companies that pay them handsome contingency fees."

"As a result, customers run the risk of paying more for coverage they do not need and receiving less in terms of overall policy benefits," the group added.

Even when the agreements are publicly revealed, WLF said clients would have to question "whether the brokers' recommendations were prompted by integrity or influence."

Richard Poppa, president and chief executive officer of the Independent Insurance Agents and Brokers of New York, said he had "never heard of any instances where clients are being steered to their detriment because of the contingency fee arrangement."

He said that a level of profitability within a book of business is generally required in such agreements. To take the view that simply by existing, the agreements create a conflict, he said, is "simplistic."

He noted that clients who felt brokers were not doing their best could lodge a complaint with the insurance department.

New York's insurance department has had concerns about contingency agreements when they were not disclosed to customers. In a 1998 circular letter the department warned that "undisclosed receipt of additional compensation is sufficient to create the perception that brokers are conflicted in their loyalties.."

The letter warned the hidden agreements could violate sections of the insurance law that allow a broker's license to be pulled for "dishonest or untrustworthy practice."

Willis Group in New York said it discloses compensation agreements "in contracts and on our Web site." Willis, as did Chicago-based Aon, called the agreements "longstanding and common practice within the insurance industry."

Aon also said it discloses the fee arrangements with clients, in invoices and on its Web site. Aon said it plans to cooperate fully with the inquiry.

Alfred J. Modugno, vice president of corporate communications for the New York-based Marsh, said his firm has received subpoenas "in this preliminary investigation" and is cooperating fully with the attorney general's request.

A Morgan Stanley analyst, Vinay Saqi, said it is unclear how much revenue is received from "Market Service Agreements" or contingency fees. The concern is that regulators might curtail the use of such arrangements, and that clients who are not informed of these arrangements might begin to scrutinize them, resulting in less revenue for the broker.

"This remains a fluid situation and one to watch," he said.

According to JP Morgan, contingent commissions accounted for over 5 percent of brokerage revenues. David S. Sheusi, a Morgan analyst, said he saw no illegality involved with the commissions because the brokerages had not "acted with improper malice to deceive clients," and had not "violated any rule or standard across the industry."

In January, Mr. Sheusi was one of the authors of a report that said the agreements present an inherent, potential conflict between brokers and their insureds because "the broker is paid by both parties in spite of the fact that its fiduciary responsibility is owed exclusively to the insured."

Special Reports /

N.Y. A.G. Investigating Broker's Fees

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