Brokerage Industry Divided on Disclosure

The NAIC has been busy drafting disclosure language in the wake of allegations that broker fees and commissions have served to disguise payoffs by insurers to brokers for steering business their way to the detriment of customers.

Yesterday, the Independent Insurance Agents and Brokers of America suggested to the NAIC that the proposed rule only apply to producers who are compensated by the client and the insurer in a particular transaction.

In other words, the IIABA seeks to make a substantive differentiation between "Wall Street" and " Main Street," as IIABA officials stated at a recent briefing.

The broker commission disclosure language under discussion would amend the NAIC's Producer Model Act,

Specifically, the IIABA calls on the NAIC to eliminate the second section of the proposal, which calls for all agents to disclose to customers in advance that they are compensated by the insurer and potentially eligible to receive contingent compensation from that insurer.

By contrast, the Council of Insurance Agents and Brokers says in its comment letter that it supports both sections of the proposed amendments to the Producer Model Act.

"The first provision of the proposed amendment appears to be intended to require specific disclosures regarding compensation when a producer receives compensation related to a transaction from both the purchaser of insurance and the insurance carrier," the CIAB says in its comments.

"When coupled with the more generic disclosure required of all producers under the second section of the proposed amendment, we believe the language fully satisfies the overall intent to inform clients of the nature of a producer's compensation arrangements."

The CIAB does ask that the disclosure be waived if the purchaser is a participant or beneficiary in an employee benefit plan or covered under a group or blanket insurance policy or annuity.

Both trade groups are also due to testify on their views at a public hearing the NAIC has scheduled for Saturday at its quarterly meeting in New Orleans.

Regulators are insisting on quick action for a broker disclosure model law as a means of showing that it can deal firmly and effectively with industry crisis. The proposed regulation was prompted by allegations of alleged bid-rigging by brokers after an investigation by New York Attorney General Eliot Spitzer.

Marsh and McLennan Inc., of New York has already responded by suspending several top-level employees and replacing its chairman and chief executive officer as well as its general counsel. Other civil and criminal enforcement actions are also expected.

In its comment letter, the IIABA says the NAIC should not overreact and should take its time to develop a model "that is meaningful and effective but without unwarranted provisions or unintended consequences."

It suggests that the NAIC does this through the Second Section of the amendments. This section requires all insurance producers to disclose that they will receive compensation from the insures for the sale; that the compensation received by the producer may differ depending upon the product and the insurer; and that the producer may receive additional compensation from the insurer based upon other factors, such as premium volume placed with a particular insurer and loss or claims experience.

"The provision has the broadest possible scope, yet the current investigations of criminal misconduct and other wrongdoing have only revealed illegal behavior at the highest levels of the commercial marketplace," the IIABA said in a comment letter signed by Robert Rusbuldt, CEO, and Wesley Bissett, senior vice president, government affairs and state relations.

"This section extends well beyond the focus of the task force and imposes costly compliance obligations on every insurance agent and broker in the country with questionable benefit for consumers," the comment letter said.

"We believe the inclusion of this section is unjustified and unwarranted, and we urge its elimination from the proposal," the IIABA letter says. "At a minimum, the section should be disconnected from the model law and made optional, like provisions in other NAIC models, so individual state policymakers can make their own determinations whether such a broad provision is needed in their jurisdictions."