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 sharply divided today on how extensive to make provisions of a model law concerning controversial broker fees.[@@]

The divisions surfaced here in a second round of discussions about the model legislation that has been developed to deal with findings from New York's broker compensation investigation. That probe has led to a civil suit alleging that Marsh broker fees and commissions included payoffs from insurers involved in a price-fixing scheme.

Under discussion is an amendment to the National Association of Insurance Commissioners' model law regulating producers. The proposed measure, in part, would require more disclosure of compensation sources. Previous discussions were held Saturday.

Despite the conflicts, regulators at the NAIC session said they are still intent on crafting a compromise measure in time for approval before Christmas, so it can be included next year on state legislative agendas.

Montana Commissioner John Morrison commenting on the proposal said corruption and fee transparency were two different issues. "So let us deal with the issue of corruption that is threatening the reputation of the NAIC and the industry itself."

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

Last October, New York Attorney General Eliot Spitzer filed a lawsuit against Marsh brokerage alleging bid rigging and other anti-trust violations. While not directly related, it was disclosed that the brokerage received an estimated $800 million in contingency fees from carriers based on the amount of business it steered to the carriers.

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

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

Gary Cohen, California Insurance Department general counsel suggested the NAIC was slow to react to the problem. While asserting disclosure was not enough, he was not specific as to other measures that should be taken.

Today's session to better reach a consensus was scheduled after rumors of sharp exchange Sunday between California Commissioner John Garamendi and NAIC president Diane Koken, during a closed door Commissioners Roundtable.

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

But defining the scope and duties of the two areas, and the amount of disclosure needed for each took up most of the special session today.

While brokers are for the most part compensated on a fee basis by the prospective policyholder, and agents by the carrier, there are enough exceptions to make an inclusive definition almost meaningless.

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

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

Since policyholder compensation was too limiting a definition for 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 of Insurance and Financial Advisors, said any resulting need for his members to disclaim their actions on behalf of their clients could result in losing sales.

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

Wes Bissett, speaking for the Independent Insurance Agents and Brokers of America, said perhaps different levels of disclosure could be required for the two groups, but only after a sharp delineation was made.

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

Mr. Morrison suggested adding the phrase "in the best interest of" to a definition for broker as is proposed in the model put forth by the National Conference of Insurance Legislators. But such phrasing would impose a fiduciary duty on brokers that does not exist in a general sense, it was noted by Mr. Cohen of California.

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

The trade group representatives argue that adding complexity to a new and allegedly fuzzy disclosure requirement will be an invitation for lawsuits.

It also remained unclear whether the National Council of Insurance Legislators would water down its more stringent broker fee proposal to be able to back the NAIC measure, as it did with a market conduct model law.

NCOIL President Craig Eiland said he would have to wait until next week to see what document finally emerges before speculating on that possibility.

Regulators must also grapple with what form of acknowledgement the disclosure will require and also how much should be disclosed. The current draft calls for the exact dollar amount. But that would not be available for contingency fees. Regulators expect to take comments on the revised model by Thursday and will have a conference call to approve a measure at the end of next week or early in the following one.

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NAIC Struggles Over Broker Fee Law

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