Serio Tells Senate Panel States Can Handle Regulation

Mr. Serio, representing the National Association of Insurance Commissioners, also told the panel that state regulators and laws are up to the task of regulating the insurance industry.

Superintendent Serio was on one of two panels that testified on "Insurance Brokerage Practices, Including Potential Conflicts of Interest and the Adequacy of the Current Regulatory Framework" before a subcommittee of the Senate Governmental Affairs panel.

The oversight hearing was convened by the committee's Subcommittee on Financial Management, the Budget, and International Security. The chairman of the subcommittee is Sen. Peter Fitzgerald, R-Ill.

On a later panel, industry representatives diverged in their efforts to defend the industry. Representatives of the Independent Insurance Agents and Brokers of America and the Property Casualty Insurance Association of America sought to differentiate between big concerns and " Main Street" agencies and underwriters.

The smaller concerns, they said, find abhorrent the practices brought to light by recent investigations of the "Wall Street" insurance brokers.

At least five states are investigating broker-insurer activities, and the New York attorney general's office has filed a civil action charging that Marsh Inc. brokerage in New York combined with big insurers to rig bids and inflate prices and took payoffs disguised as fees and commissions to steer unwitting customers to carriers.

He has also sued Universal Life Resources brokerage in San Diego.

Testifying as an officer of the Big I, Alex Soto, president of InSource Inc., a Miami-based independent agency, said, "I am saddened and disappointed that such a small group of my peers might lead some observers to question the commitment of our entire industry to its clients."

Mr. Soto explained, "In my own office, like countless others nationwide, we aspire to offer quality insurance products and professional service, and we seek to do so with honesty and integrity." He added that, "We place great emphasis on operating with respect and fairness in our business relationships."

His agency, Mr. Soto said, "however, is not unique in this regard. The vast majority of agents, brokers and insurance professionals operate consistent with these same principles and morals, and these millions of individuals would not consider for an instant engaging in the type of illicit conduct alleged against a broker in New York."

Ernst Csiszar, president and CEO of PCI, said, "We condemn any illegal, deceptive and anti-competitive practices that distort the competitive market." He added, "We take these charges very seriously. The industry, state law enforcement officials and state regulators are responding."

"However," Mr. Csiszar said, the alleged illegal conduct identified by New York Attorney General Eliot Spitzer "is limited to a scant few in the industry. We do not believe that it represents a significant failure of the regulatory system."

In his testimony, Mr. Csiszar said that while the investigation focused on the "blatantly illegal bid-rigging in the market for large commercial risks, some have implied that the majority of American consumers are being damaged because agents and brokers steer business to certain insurers induced, at least in part, by incentive compensation arrangements."

But, Mr. Csiszar insisted, "PCI does not believe that incentive compensation represents an inherent or systemic conflict between agents and brokers and their clients, or that it deters agents and brokers from serving the needs of insurance consumers. The integrity of an entire industry should not be called into question because of the actions of a few bad apples."

But Albert Counselman, Chartered Property Casualty Underwriters Society, president and CEO of Baltimore brokerage Riggs, Counselman, Michaels & Downes Inc., and past chairman of the Council of Insurance Agents and Brokers, defended his members.

"While isolated bad actors created a corrupt scheme to limit real choices for some customers, the role of contingent commissions in this evil equation has been irresponsibly hyped and misrepresented.," Mr. Counselman said.

"Contingent commission payments were not central to the alleged fraud, despite the connections that some have claimed," Mr. Counselman argued. "Contingent commissions are legal and proper methods of compensation that have been used throughout the industry for decades. Although they are not a significant source of income in most firms, they are, nonetheless, well understood and widely accepted by the sophisticated commercial marketplace."

"It is the lack of effective disclosure in some cases, combined with the intent to defraud (in isolated cases), that is at issue here, not a systematic industrywide failure to disclose fees or a failure of the entire business model, as some have suggested," Mr. Counselman said.

Superintendent Serio was representing the NAIC as chairman of its Governmental Affairs Task Force in his testimony. He said that the three-prong program to protect consumers will include a new model law on broker disclosure of compensation.

It will also involve coordinating multistate information requests and analyses of certain business practices by brokers and insurers, and include the launching of an online system that will allow anonymous filing of "tips" to alert state regulators about unlawful or unscrupulous business practices.

He also defended state insurance regulation. "Insurance is a complex commercial product that is very much different from banking and securities. Consequently, the process for regulating insurance products must also be different."

"Ultimately," Mr. Serio said, "a federal regulator would adversely affect state premium taxes and other revenues, which totaled $12.3 billion in 2002."