Insurance industry representatives were divided on the level of disclosure needed on broker compensation in appearances at a hearing by New York State officials.

Their views were delivered at a joint New York State Insurance Department/Office of Attorney General proceeding examining agent and broker fee and commission disclosures.

This hearing, held in Albany yesterday, was the second of three hearings on the issue.

New York's two independent insurance agent trade groups opened up the testimony by defending profit sharing and contingent commission arrangements.

Neal Sullivan, chair of the Independent Insurance Agents and Brokers of New York (IIABNY), drew a distinction in his testimony between law abiding brokers and what he called "mega brokers" who were forced in settlements with regulators to abandon contingent commissions after they were linked to price-fixing activity.

He said it would be unfair to paint all brokers and agents with the same brush due to the illegal activities of some.

It is "difficult to have any sympathy" for some of the mega brokers who now claim that producers who accept contingent commissions have an unfair competitive advantage over those who cannot accept such compensation because of settlement agreements," said Mr. Sullivan.

John Bailey, past president of the Professional Insurance Agents of New York (PIANY), pointed out the difference between traditional profit-sharing arrangements in which most agents are engaged and placement service agreements, which he said were used in the past to illegally manipulate prices.

Ellen Melchionni, president of the New York Insurance Association, described contingent commissions as "nothing more than a form of incentive-based compensation that is used in many New York State industries" such as retail and car dealerships. She added that this type of compensation has existed in insurance for decades and is not new.

Current laws, she said, provide enough protection for insurance consumers and are adequate to curb improper actions by producers.

David Rahill, testifying for Mercer Health & Benefits, LLP, argued that the current arrangement with respect to contingent commissions is unfair.

He said that producers currently operate under a two-tiered market consisting of those who are allowed to receive contingent commissions and those who are not because of settlements.

He added that the "partial regulation through settlements" has created new problems for the market without solving all of the old problems.

All brokers, Mr. Rahill said, should be held to the same standard. He added that he is agnostic regarding the ultimate decision that the department makes with respect to contingent commissions; he just wants that decision to be consistent for all producers.

Ms. Melchionni acknowledged the possible competitive disadvantage for companies that signed agreements regarding a lifetime ban on accepting contingent commissions. She said that it "might be best" to lift these restrictions and "focus on universal disclosure."

There was disagreement regarding the extent of disclosure, as well. Mr. Bailey and Mr. Sullivan favored voluntary disclosure. They said mandatory disclosure might confuse consumers, and would be burdensome and time consuming for both consumers and agents.

Ms. Melchionni said consumers are more concerned with getting proper coverages at the right price than how the producer is compensated.

Several who testified noted that consumers have never inquired about how their agents or brokers are compensated.

Mr. Rahill said mandatory disclosure measures have been positive, though he said the department could ease some of its requirements under settlement agreements.

In general though, he said clients like disclosure and transparency, and that it is good for business. He noted that many other industries have such disclosure requirements, and the insurance industry must now make up its mind whether or not it will follow these other industries.

George A. Steadman, speaking on behalf of the Council of Insurance Agents and Brokers (CIAB), said that his association has supported disclosure efforts for 10 years, and continues to do so.

But he said existing laws prohibit any negotiation between clients and producers with respect to the level of compensation. Clients, he said, either have to accept the level of commission, or find a new broker. Easing these constraints, Mr. Steadman said, will allow for negotiation and strengthen the producer/client relationship.

In submitted testimony, Paul Magaril, regional manager and counsel for the Property Casualty Insurers Association of America (PCI), said, "Transparency and disclosure are important components of open, fair, competitive and reasonably regulated markets, and we believe that such efforts bear careful consideration."

PCI said it opposes "overreaching or burdensome proposals that fail to deliver any real value to consumers. Public policy makers should not attempt to impose blanket prohibitions on incentive compensation programs. The terms and conditions of such agreements are best left to the private parties engaged in the contracts."

The third and final department hearing on producer compensation will be held tomorrow in New York.

Special Reports /

Broker Compensation Disclosure Debated At N.Y. Hearing

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