Voices Of Protest Over Calif. Broker Regs

California Insurance Commissioner John Garamendi ordered the drafting of the regulations in March after he received a letter from a Washington, D.C.-based public interest group, The Washington Legal Foundation, which was critical of the incentive commission practice. Commissioner Garamendi also began an investigation into the matter while a similar probe was being undertaken in New York.

"We understand that in the wake of the allegations of illegal bid-rigging by a few large brokers arising from the investigation by New York Attorney General Eliot Spitzer, state insurance regulators want to respond quickly to restore consumer confidence in the insurance industry," said Sam Sorich, president of the Association of California Insurance Companies, an affiliate of the Property Casualty Insurers Association of America in Sacramento. "In fact, ACIC supports the general disclosure of broker compensation and believes that such disclosure is an important component of open, fair and well-regulated markets."

However, Mr. Sorich noted that in the case of California, the state's proposed regulation is overly broad, poorly drafted, and fails to deliver meaningful information to the consumers who need it most.

"Unfortunately, the California Department of Insurance proposal misses the mark by expanding disclosure requirements to all insurance sales representatives?including agents and salaried employees of insurance companies," Mr. Sorich said. "Moreover, the regulation would create unreasonable requirements that no insurance agent or broker would be able to understand, let alone meet."

Agents' groups also found the regulations too unwieldy to operate under.

"We support disclosure of broker fees, but these regulations are so poorly drafted and ambiguous, they would be impossible to follow," explained Steve Young, general counsel for the Insurance Brokers & Agents of the West.

Under the proposed rules, agents and brokers would be required to disclose the amount and methods for computing their compensation to clients and prospects. Mr. Sorich said that the new disclosures are cumbersome and argued that any new disclosure rules should be applied solely to brokers. Brokers, the ACIC argued, represent the client in the insurance transaction and can be paid by both the client and the insurance company. Insurance agents, however, represent one or several companies and are compensated by the insurer.

"The problems identified in the Spitzer investigation are limited to broker relationships. We believe that regulatory or legislative solutions should focus on those situations," said Mr. Sorich. "The Department of Insurance proposals cast such a wide net that every insurance agent and broker will become entangled in it, leading to another layer of needless bureaucracy, driving up the cost of doing business in the state and delivering little if any value to California consumers."

Clark Sitzer, executive vice president of the Professional Insurance Agents Western Alliance, said his association, "stands in opposition" to the proposed regulations. The proposed rules, he said, "seem to be an overreaction" that will apply a solution to small, "Main Street" agents and brokers for a problem found only with the large brokerage firms.

"The proposed regulation will have an effect on the small agent and broker that it just doesn't have to," he said.

Mr. Sitzer said that while small agents and brokers sometimes run afoul of minor regulations, he had not heard of them being involved in the types of bid-rigging and price fixing schemes uncovered by Mr. Spitzer's investigation. He noted most of these agents and brokers would not make enough on the illegal payments to make the risk worth their while.

"There's just not enough incentive," he said. "These guys could go out of business if they got caught doing that."

Additionally, the new rules would require agents and brokers to place the client's business with "the best available insurer." Mr. Young said this proposal would be impossible for brokers and agents to operate under and would, in fact, run counter to state law.

Association representatives said that the perception of what the "best insurer" is can be difficult to define because insurance placement decisions are made based on price, terms and conditions, or carrier solvency, or a combination of these and other factors. Such a definition would result in a flurry of litigation, Mr. Sorich warned.

"There is no way the term ?best available' could be easily understood," he said. "The regulation asks for an impossibly subjective determination likely to be questioned after the fact when a problem occurs."