E&Y: Probe May Hit Independent Agents, Fees Will Go

Mr. Porrino also said during today's press briefing that the ongoing investigation into the alleged brokerage bid-rigging would expand to include other questionable business practices, including selling reinsurance/insurance financial engineering products as well as reinsurance tying.

He noted that financial engineering products, sold by carriers to help corporate clients enhance their financial statements and smooth their earnings figures, would be one of the top issues to come under more intense regulatory scrutiny.

Activity of that nature by American International Group's Financial Products is currently under scrutiny by the Securities Exchange Commission and a federal grand jury in Indianapolis, AIG has disclosed.

Additionally, "It's probably just a matter of time before there is an official allegation about reinsurance tying," Mr. Porrino said. Tying, which some insurance observers say has been a common industry practice for years, refers to arrangements where a broker awards its client's business to a particular insurer under the condition that the carrier place its reinsurance through the same broker.

Subpoena's for this information have been issued to brokers by New York Attorney General Eliot Spitzer's office.

And as the industry-wide investigation unfolds, Mr. Porrino observed that "there is no doubt" disclosure requirements are escalating.

He said contingent commissions at big commercial brokers are disappearing, whether by legal action or practice. "They are in essence gone now for major risks," he said.

Additionally, "the fines are going to be extreme for brokers that were doing the alleged bid-rigging and for insurers that helped enable the bid-rigging. There will be a lot of effort placed on figuring out how much bid-rigging was going on at commercial carriers," Mr. Porrino said.

In the mid-market, Mr. Porrino also predicted, the changing marketplace practices would mandate disclosure of contingent commissions or even eliminate them altogether.

Mr. Porrino also added that in the personal-lines side, even at the retail level, "I would not be surprised if certain agents engaged in some level of steering."

"It's just human nature?whether or not they meant to do it. When there are additional fees like contingent commissions coming in, there is a natural inclination for some agencies to steer business to people who are paying them the highest commissions," according to Mr. Porrino, who postulated that this specific issue will get closer scrutiny from state regulators in coming months.

Mr. Porrino stressed, though, that these agents haven't violated any law because they are acting as representatives of the insurance companies, not the insureds. "The only thing these independent agencies may have violated is maybe the trust of their customers," he said.

If it turns out that there are enough examples of independent agencies steering business to carriers paying higher commissions, "whether such commissions were paid upfront or down the road, you will see changes enacted," he said. Such changes would include disclosures of incentives, "which I think is a foregone conclusion in the personal-lines space."

Mr. Porrino also forecast that such incentive fees could be eliminated altogether among independent agencies. "There is a reasonable chance of that happening. It will depend on what's found when regulators go in and start looking at all the e-mails of some of the smaller independent agencies," he said.