Doing The Time Warp
When I heard that major insurance brokers were being subpoenaed in a probe of their contingency fee arrangements with carriers, I thought I had stumbled into a time machine and awoken in 1998! That was the year you-know-what hit the fan about whether side deals between intermediaries and insurers were influencing the placement of coverage to the detriment of risk managers, who were often oblivious about the existence of such sweeteners.
However, when I realized that New York State Attorney General Eliot Spitzer's office was the one doling out subpoenas, I knew I was very much in the here and now. Mr. Spitzer is the man of the hour when it comes to cleaning up the financial services industry. In his most recent triumph, he was way ahead of the curve in curbing abuses by the mutual fund industry. He collected hundreds of millions of dollars to penalize conflicts of interest and, more significantly, changed the way the major players do business to protect the small investor.
Now Mr. Spitzer is turning his attention to commercial insurance. He is certainly not way ahead of the curve on this dispute, which I thought was settled back in early 1999, after the top brokerages agreed to disclose their fee arrangements with carriers often on their Web sites for the whole world to see.
Not all brokers were enthusiastic about revealing such deals, and for good reason. It is not easy to explain how dangling bonus fees and/or higher commission rates for delivering a certain volume or quality of business to a carrier would never corrupt a broker's integrity.
The Risk and Insurance Management Society provided terrific leadership and succeeded in convincing brokers to change their ways. The New York Insurance Department also stepped up in 1998 with their own hammer a circular letter warning that "undisclosed receipt of additional compensation is sufficient to create the perception that brokers are conflicted in their loyalties."
However, the changes that were volunteered stopped at disclosure. No one swore off contingency deals, which can be quite lucrative for a productive brokerage.
The question now is whether disclosure goes far enough. Does knowing that your broker has a side deal with a carrier nevertheless represent an unavoidable conflict of interest?
Whatever the answer, this is going to be dicey. Mr. Spitzer does not subpoena people lightly. If he shines his spotlight on you, you had better have your story straight, or he will mess with your business for sure. He is sharp, media-savvy and relentless, and if I were an insurance broker, I would be afraid for my livelihood.
In addition, Mr. Spitzer is not the only authority brokers have to worry about. California Insurance Commissioner John Garamendi is also on the case, the New York department is sniffing around once again, and others are likely to follow suit, prodded by the ones who started this latest brouhaha the nonprofit Washington Legal Foundation.
And don't forget about risk managers. RIMS officials say they will review their stand from 1998 that backed transparency but did not call for a ban on contingency fees. If Mr. Spitzer turns up any evidence that brokers steered clients to certain carriers against the buyer's best interest, this probe could change the brokerage business forever.
Scary talk? Indeed! But we are dealing with a big-game hunter in Mr. Spitzer, and he clearly has targeted the commercial insurance brokerage industry for reform. Good luck!
Sam Friedman
Editor-In-Chief
Reproduced from National Underwriter Edition, April 30, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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