Personal Lines Get No Pass In Spitzer Probe Agents defend profit-sharing deals; Serio calls for more legislative support

While New York Attorney General Eliot Spitzers investigation of insurance brokerage compensation has focused on commercial lines, that could soon change as the crusading gubernatorial candidate revealed that personal lines have not escaped his offices scrutiny.

Any focus on personal lines has many agents concerned that traditional profit-sharing practices, which are the lifeblood of many agencies, could fall victim to this new wave of reform.

Testifying before a special hearing of the New York Assembly Insurance Committee in New York City examining “Brokergate,” Mr. Spitzer said only the “public focus” of his probe into industry practices has centered on commercial lines. “We have an ongoing set of investigations into other lines, including personal lines, that will come out in due course,” he warned.

Nonetheless, any wholesale tinkering with personal lines compensation formulas has industry leaders such as Sharon Emek, treasurer of the Independent Insurance Agents and Brokers of New York, concerned about the future. In testimony at the hearing, she took special pains to point out the difference between profit-sharing arrangements that benefit independent agents and market service agreements, which have been at the heart of the scandal surrounding alleged bid-rigging by Marsh and major carriers in return for contingency fees.

Noting that MSAs are based solely on volume, she said they could “lend themselves to so-called steering of business by unethical brokers to insurance companies with the most lucrative compensation arrangements.”

However, profit-sharing agreements, Ms. Emek explained, are “based on annual performance criteria and take into account other factors in addition to volume. Profitability, growth and retention are common factors that are considered in profit-sharing agreements.”

Assemblyman Alexander Grannis, D-Manhattan, who chairs the Assembly Insurance Committee, expressed concern that the existence of such arrangements could lead agents to steer business to companies as part of deals that might not be in the insureds best interest.

Ms. Emek asserted that most of the arrangements with carriers are similar enough that it would not make that much difference. “But the most important thing to remember is that the retention of our clients is our paramount concern,” she said. “And to do that, we must give them the best coverage at the best price.”

After the hearing, Mr. Grannis told National Underwriter that a legislative package he plans to prepare in the wake of the broker bid-rigging scandal would have to await the full outcome of Mr. Spitzers probe.

Mr. Grannis said he would also await recommendations from New Yorks insurance superintendent, but he would not be held to them. Those recommendations could be delayed while the department undergoes a transition from Greg Serio (who left his post this month to join a private lobbying firm) to his successor, former Republican Assemblyman Howard Mills, who lost a race for the U.S. Senate last November to incumbent Chuck Schumer.

However, any Assembly proposal would face an uphill battle with a Republican-controlled State Senate and a Republican governor, industry observers contend.

One point that seemed certain was that the disclosure approach called for in the National Association of Insurance Commissioners broker fee model would not cut it with either Mr. Grannis or Mr. Spitzer. “Ive never been a big fan of NAICs take-it-or-leave-it models,” said Mr. Grannis.

Mr. Spitzer told the Assembly panel that he isnt ready to propose a legislative fix to counter the insurance industry fraud and corruption he is investigating. “As we proceed, we will focus on precise legislative remedies that will be most appropriate,” he said

In his farewell appearance before the committee as superintendent, Mr. Serio, who jointly investigated the industry with Mr. Spitzer, told the committee that legislation is needed to provide the state insurance department with additional funding and the authority to conduct periodic examinations of insurance brokerage firms.

Mr. Serio took pains during the hearing to explain that he had been investigating brokerage fees even as the attorney generals office began looking at the matter. He said that if he had had the funding and authority to examine brokerages, “then perhaps the $800 million of net revenue [in Marsh contingent fees] would not have gone unnoticed.”

Mr. Serio, a Republican administration appointee, and Mr. Spitzer, an elected Democrat, generally had complimentary remarks about their agencies activity to investigate the industry. However, Mr. Serio took exception to some of Mr. Spitzers comments.

While praising the role of the insurance department in conducting its investigation of brokerage activity, Mr. Spitzer said improper activity by brokers had resulted from both a failure of regulation and the companies own self-regulatory mechanisms. “There were red flags flying all over the map,” he said.

Mr. Serio responded that he had been aware of the “red flags” and had been working to remedy the problems.

When Assemblymen Grannis probed for information as to how exactly the investigation of broker fees had originated, Mr. Spitzer said he had commenced it and called on Mr. Serio for help.

The superintendent said that while he did respond to Mr. Spitzers request in April 2004which followed a letter to the attorney general from the Washington Legal Foundation questioning broker incentive paymentsthere had been a confluence of investigations.

Mr. Serio said he had issued a cautionary industry advisory letter on the topic of broker fees in 1998, and he had looked into them again in 2002 after American International Group asked for an opinion on the legality of their fee payments. Mr. Serio said he had been stymied by the insurance industry when his inquiries ran into “a conspiracy of silence.”

Mr. Serio also testified that there were other problems with insurance industry business practices, citing as an example the litigation that erupted over just what policy language applied to the destruction of the World Trade Center.

Both Mr. Serio and Mr. Spitzer expressed concerns to the committee about the development of new offshore insurers that play an important role in the industry but are beyond the reach of the state regulatory apparatus. Mr. Serio also called for greater regulation of the reinsurance industry, calling it “the tail that wags the dog.”

Insurance representatives at the hearing said that corruption is not widespread and warned against any legislative regulatory overreaction that could hurt business.

Reproduced from National Underwriter Edition, January 20, 2005. Copyright 2005 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.