Spitzers Shadow Looms Large For 05 Fee probes put agent and broker associations on the defensive

While the three major property-casualty producer associations dont always see eye to eye, for the coming year they share a major priorityrepairing the damage to their members reputation caused by allegations of wrongdoing on the part of a few while keeping regulatory overreaction in check.

“Our number-one initiative is to address the compensation issue that has jolted our industry,” said Joel Wood, senior vice president of government affairs for the Council of Insurance Agents & Brokers in Washington. “The first thing we must do is to insure, on the Congressional side, that our industry does not suffer further reputational damage.”

Regulatory reform stemming from New York Attorney General Eliot Spitzer's investigations into alleged broker-insurer bid-rigging and contingency fee abuse is “our largest issue going into 2005,” agreed Leonard C. Brevick, executive vice president of the National Association of Professional Insurance Agents in Alexandria, Va.

“We are very attentive to what is being said about compensation issues,” chimed in Tom Grau, president of the Alexandria, Va.-based Independent Insurance Agents & Brokers of America. “We are meeting frequently over the issue. That is consuming more of my time than I thought any issue would. We don't always control our destiny. You have to deal with the reality that confronts you.”

They all referred to the industry scandal sparked by Mr. Spitzers suit against Marsh & McLennan Companies over allegations that its Marsh insurance brokerage subsidiary used price-fixing and other abusive practices to place business with carriers paying lucrative, volume-based contingency fees over and above standard commissions.

The major worry, according to Mr. Wood, is that the Spitzer scandal might overshadow and perhaps even torpedo the industrys broader legislative agenda, starting with extension of the Terrorism Risk Insurance Act, which expires on Dec. 31.

“The reality is we have never faced this kind of scrutiny,” said Mr. Wood. “We have been put into a defensive posture. The response is not proportionate to the misdeeds, but our member firms will have to demonstrate that they work for the client and that there is 100 percent transparencythat is a proactive agenda.”

He added that “we are not going to hide under our desks and hope and wish the investigation would go away. It will not be easy or happen overnight, but I see us taking some very assertive actions to underscore the commitment brokers have to their clients.”

Mr. Wood is confident congressional staffers will not be influenced by headlines damning the industry and will listen to reasonbut he is not so sure the same can be said at the state level. Changes are certain to be made in state producer licensing laws in reaction to the brokerage scandals, spurred on by a new National Association of Insurance Commissioner model bill, he noted.

“We have a decent chance of coming out of this with a disclosure regimen that works well for clients and is not in some onerous form that will be hard for our members to live with,” he said.

However, he fears there are some states bent on imposing regulations that go beyond the NAIC model, causing a legal nightmaremost notably in California, where Insurance Commissioner John Garamendi is considering language to require producers to deliver “the best available coverage.”

“It's a trial lawyers dream,” he remarked, adding that the definition is so vague (does “best available” mean price, solvency, claims administration or other issues?), it would create an adversarial relationship between brokers and carriers, as well as brokers and buyers, to no ones benefit.

“Our overall goal is 100 percent disclosure of compensation so the client knows up front what the broker is making and what his responsibility is to the client,” according to Mr. Wood.

“There has been a lot of overreaction to the choice independent agents offer,” said PIAs Mr. Brevick. “It is viewed as a conflict. There is nothing more wrong than that. Because agents deal with multiple markets, it is being assumed there is the opportunity to steer accounts [to carriers paying the highest bonus fees]. Its ridiculous. We reaffirm that choice is not a conflictit is a driver of choice and competition.”

“The misdeeds of global brokers is now being used to browbeat changes to the industry to advance political ambition in a way that will enrich trial lawyers and not help consumers,” charged Mr. Wood.

Mr. Brevick said PIA hopes to talk regulators and legislators out of any initiative that would do more harm than good for the market, especially when it comes to federal regulatory options. “The first law of the jungle is never to look like food,” he said. “Federal regulation [of the insurance industry] would turn us into steak.”

He said PIA wants to see market reform, but not to the detriment of the state-based regulatory system, which he insists still gets the job done.

It should be noted that while IIABA also seeks to preserve state oversight, CIAB backs optional federal chartering for brokers.

At IIABA, Mr. Graua sales executive with The Cogswell Agency in Great Falls, Mont.said he sees grass-roots activism among the Big I membership as key to promoting workable reforms. He said such activity has already proven instrumental in helping formulate the State Modernization and Regulatory Transparency (SMART) Act sponsored by Reps. Michael Oxley, R-Ohio, and Richard Baker, R-La., in Congress, which would create a federal-state regulatory partnership rather than an opt-out federal charter option for brokers and carriers alike.

“We are anxious to see [regulatory reform] legislation move along, and we want to engage our members to have them engage and persuade their legislators to support and move it along,” he said.

Reproduced from National Underwriter Edition, December 30, 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.