Disguised Execs Assess Spitzer Probe Fallout

PLUS tries anonymity with panel to draw out honest reactions on industry practices

Marshs size may have made the brokerage firm “an easy target” for New York Attorney General Eliot Spitzer, but it didnt predispose the firm to engage in bad behavior, an insurer representative said at a recent industry conference.

During the international conference of the Minneapolis-based Professional Liability Underwriting Society held last month in San Diego, the insurerwhose identity wasnt revealed, as he spoke from behind a screenwas responding to a question from an audience participant during a session titled, “Politically Incorrect.”

The session, touted as an opportunity for attendees to hear the truth from “industry leaders” who had no fear of repercussions about what they said, was planned well before news of the broker probe was announced. But it was a foregone conclusion that subjects like bid-rigging and contingent commissions would come up in such a forum.

For the most part, even though panelists voices were altered to disguise their identities, they responded to questions from the moderator and the audience with the types of responses that they might otherwise provide in full view of their peers. For example, two broker representativesSpeakers No. 1 and 2said news of the Spitzer probe created an “awkward opportunity” to have discussions with clients about practices and income.

“Its not the point in time to slice and say there are good kinds and bad kinds. Its time to say there are practices in our industry that are long-standing and under fire, and as an industry, those practices are going to change,” Speaker No. 1 said.

Speaker No. 2 agreed, but added: “At the same time, what concerns me is thatthere was some egregious behavior” detailed in the attorney generals complaint. “Is it going to rise to the level where insureds will think were all doing this?”

But Speaker No. 3 did what was promised several times during the hour-long sessionpresenting some no-holds-barred opinions on recent events.

Asked specifically whether bid-rigging would have occurred if antitrust regulators had not allowed Marsh and other national brokers to grow to their current size, Speaker No. 3 said lack of competition had little to do with it. “I think Marshs size made them a nice, easy target. The odds of them being the place that it would be found were the highest,” he said.

He then asked the audience members who were underwriters to raise their handsand to then lower their hands if they never had a producer tell them that they could get the insurer more money than it quoted. When many hands went down, he said: “I think there are a lot of people who are not protected by a screen” who are not willing to admit they have ever been told that they were quoting so far below the market that they could get more.

“There is a slippery slope and a big range of conduct out there” that may fall short of bid-rigging, he added, “but we need to be thinking about all of these things from an ethical perspective.”

Speaking in full view of the PLUS audience at the opening session two days earlier titled, “Outside Perspectives on the Professional Liability Insurance Industry,” Vince DiBlasi, a lawyer for New York-based Sullivan & Cromwell who defends financial services firms, suggested that broker practices targeted by Mr. Spitzers probe were well knowneven to buyers.

“Where you have practices that have gone on in the industry for years and years and years, and people go from [working as] the broker to the carrier to the corporation buying insurance, I have a very hard time seeing that as a disclosure case,” said Mr. DiBlasi.

“It's certainly not actionable as a class-action because there are plenty of people who knew that there were such things as incentive [compensation] and other forms of threshold-crossing structures that brokers and insurance companies entered into, and by that I mean the consumers,” he added.

“In a market that involves professionals [and where] almost everyone knows what the compensation structure is, I have a hard time thinking that you're going to persuade anybody that a fraud was committed by some of those people on others of those people while they were in one job but not the other. I just don't see it,” he said.

Back at the “Politically Incorrect” session, Speaker No. 3 spoke about the contingent commission issue and set himself apart from any other insurance company leader who spoke during the three-day conference by saying that contingent fees have a place in the industry that should continue. Indeed, he added, it would be “a travesty if as a result of all this, [an insurance] company could not differentiate the compensation it pays to its different distributors based on the size or profitability of business that is brought to them.”

“I think one of the dangers we now face is that if all contingent commissions, profit-sharing, PSAsgo away, [then] all boats will rise with the tide of increased base commission,” he said, referring to a term “socialist approach,” which he said he heard applied to Mr. Spitzers view of how broker compensation should work. “Im very concerned if we cant differentiate compensation based on the quality of business we get.”

An audience participant noted that other industries commonly base compensation on quality. How can the insurance industry do this and not look like “the bad guys?” she asked.

Speaker No. 3 said that while he was a proponent of differentiated broker compensation, it will be difficult to implement because brokers would be uncomfortable with the degree of disclosure required to allow it. In particular, brokers would have to reveal when they get more money from one place than another.

Pointing to press releases from recently subpoenaed companies that talk about “consistency of compensation from different markets,” he said the differentiation that he wants is “at odds with what producers are looking for” to get them to look “as clean as possible.”

However, Speaker No. 1 (one of the broker representatives) suggested that he was willing to go the disclosure route. “The issue is the perceived conflict of interest, and the solution to the perceived problem is going to be one of complete disclosure,” he said. He suggested that by arming clients with full information on coverage, premium and the overall benefit to the broker of choosing a particular option, clients could make their own judgments about possible conflicts.

Giving an industry outsiders perspective, Pedro Galban, an investor from Credit Suisse First Boston, told those attending the opening session that “youre probably better rid of something” like contingent commissions “that creates questions of the kind being raised,” at least from a public relations standpoint.

Giving a regulators view, David Diehl, deputy commissioner of the California Department of Insurance, said “contingent commissions have been out there sinceas long as dirt,” noting that theyve been around for all his 30 years in the business (as both a regulator and insurance company employee).

Theyre not part of “some new Ponzi scheme,” he said. “The question we [regulators] have to ask ourselves is whether the practice itself is bad, or whether there are a few bad apples in the process making it bad for everyone,” he said.

What Directions Will The Markets Take?

By Susanne Sclafane

Speakers at last months PLUS conferenceboth those clearly identified, as well as those who participated anonymously (speaking from behind a screen as part of a “Politically Incorrect” panel of industry officials)made a number of memorable observations.

Q: “Are you seeing underwriters draw a line in the sand and walking away from business?” brokers were asked.

A: “I think its a bunch of BS,” Speaker No. 2 said during the anonymous panel discussion. “They say theyre going to hold the line, they start to at the beginning of the process, and then as the renewal process moves on and theyre in jeopardy of losing business, 90 percent of the time they cave in.” Speaker No. 1 added that the “line in the sand is erased by the next wave that goes over it. As a broker, my job is to push and see where the evolving line is for each deal.”

Q: “We come to these conferences and talk underwriting discipline. But what is that?”

A: Tony Galban, vice president and underwriting manager for Chubb Specialty in Warren, N.J., raised this question as he spoke among a panel of experts on directors and officers insurance about carrier solvency.

First, “you have to be willing to continue to underwriteto do what you did when you were fixing your book Do not succumb to market pressures to be easy to do business with,” he said. While underwriters may carry out those steps, they often miss a final key onewhich is to stop rationalizing bad accounts, he added. “If youre really walking the walk, youve got to be willing to let some of them go,” he said.

Q: “How are you going to go to the sidelines when the market slides?”

A: The question was raised by Stephen Sills, president and chief executive officer of Farmington, Conn.-based Darwin Professional Underwriters, during a PLUS conference interview with National Underwriter.

“All organizations talk about the fact that when the marketplace slides, theyre going to go to the sidelines The question is: How can you do that when you build up an organization of 1,000 people?” he said, suggesting that playing golf wouldnt allow such insurers to make the payroll.

At Darwin, Mr. Sills said that strategies his company has undertaken to deal with going to the sidelines include building a diversified professional liability platform around small-business customers and technology to do the business “so you dont have to feed 1,000 mouths.” Darwin plans to roll out a dynamic application system for small insurance agents errors and omissions and private D&O lines in January.

Q: What do you see in the short-termsix months to a yearas to the future of Bermuda?

A: “As a broker, I question the value equation,” Speaker No. 1 said during the anonymous panel discussion. “What can I get there that I cant somewhere else?” Excluding needed participation in truly mega-deals, he asked, “Why do we want to schlep to Bermuda? Whats the value to the client paying the bill?”

Speaker No. 2 agreed. “I have a hard time seeing the direction of Bermuda long term unless they come up with new products or [pursue] consolidation opportunities.” With domestic relationships in place and readily available onshore capacity, “I dont see a need to develop those [Bermuda] relationships.”

Q: What lessons have been learned by professional liability insurers in recent years?

A: Theres no way to make money writing on Fortune 100 accounts on an excess basis, Speaker No. 4 said during the anonymous panel discussion, echoing very similar comments expressed by insurers during the D&O session.

The primary carrier has a claims-handling relationship with the insured, he said. Writers of high-excess coverage have only tenuous relationships with insureds. “Its a pure commodity play,” he said, noting that theres “no concept of payback” built into a relationship and that excess carriers continue to face very severe losses.

Meanwhile, he said, “the amount of capital chasing this [excess] business is just too great [and] continues to drive rates down,” adding that $100 million D&O claims would “burn up that capital.”

Speaker No. 3 preferred to talk about the lesson that he said hadnt been learnedthe need to recognize and incur loss reserves in a timely fashion. The lack of reserves being put away for entity securities public D&O is what “is going to hit us as an industry smack in the face,” he said.

Q: Will reinsurers continue to support the D&O market?

A: “The reinsurers Ive talked to dont have the burning desire to play in this market,” said Jim Nestheide, vice president of financial and professional services for St. Paul Travelers, contrasting the situation 10 years ago when reinsurers felt they had to be in D&O. Theyll use their capital elsewhere, he said, reporting that one reinsurer told him that its not possible to make money on publicly-traded D&O.

“Jan. 1 will be an interesting renewal season,” he said. “Well get through it,” but reinsurers are going to reduce the number of cedents they have, he predicted, also forecasting structure changes such as loss caps and excluded classes on treaties.

Underscoring the impact of reinsurer discontent on the D&O market, he said that beyond a few large insurers that dont have to buy much reinsurance, for those insurers that do, “roughly one-half the D&O capacity is reinsured.”

Reproduced from National Underwriter Edition, December 16, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Disguised Execs Assess Spitzer Probe Fallout

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