Connecticut Jumps On Fee Probe Bandwagon

Connecticut Jumps On Fee Probe Bandwagon

Survey reveals risk manager concern, as over two-thirds cite conflict of interest

Connecticut is joining the investigation into producer contingency fees at the same time a new survey shows risk managers are not happy with the side deals struck between brokers and insurers.

Connecticut State Attorney General Richard Blumenthal said he is looking into contingency fee arrangements after receiving complaints from risk managers in the state. According to The New York Times, Mr. Blumenthal's investigation began around the same time New York and California launched their probes. He said he has been in touch with investigators in those states on the issue.

A representative for the Connecticut Insurance Department said Insurance Commissioner Susan Cogswell would be meeting with Mr. Blumenthal to discuss his concerns about contingency fees. No additional comment would be available until after the meeting, she said. Mr. Blumenthal did not return a request from National Underwriter for an interview.

New York State Attorney General Eliot Spitzer has subpoenaed records of Aon, Marsh, Willis and Kaye Group, a subsidiary of Hub International, as well as Chubb Insurance and perhaps others in his probe of contingency fee arrangements. In California, the insurance department confirmed it is also looking into the practice. All have said they are cooperating in the investigations.

On top of these probes, a New York attorney has filed a suit in California against major insurers for paying “bribes and kickbacks” to small brokers to secure their business. The attorney, Finley Harckham, a partner in the New York law firm of Anderson Kill & Olick, said he has been contacted by some regulators concerning the suits, which target Allianz, American International Group, Chubb, the Hartford, and others.

Contingency fees are paid by insurers to brokers, based either on the performance of their book of business or the premium volume they generate. The practice, critics suggest, could lead brokers to steer business to the insurer paying the best fees and not because it offers the best deal to the insured.

The fees remain a sore point with risk managers. A survey by Advisen, Ltd. of 330 risk managers found that 69 percent believe the fees (also known as placement service agreements) represent a conflict of interest. Less than 20 percent said they receive adequate disclosure of such fees, while 56 percent believe brokers are not disclosing the fees in all cases.

“The survey indicates that there are a large number of risk managers who are unhappy with the quality of disclosures,” commented Dave Bradford, executive vice president at Advisen, a New York-based consulting firm that works with the Risk and Insurance Management Society on its “Benchmark Survey.”

RIMS President Nancy Chambers said the issue has remained “on the radar screen” of risk managers since it came up in the late 1990s, when the New York-based corporate insurance buyers group put out a position paper on transparency in broker compensation. Mr. Spitzers investigation has heightened interest in the subject for risk managers, which she said the Advisen survey confirms.

In light of this continued interest, RIMS decided to put together a task force back in April to reexamine its position on broker compensation and see if any update is needed, she said. No deadline has been set to issue a report and interim recommendations expected last week were not yet ready, Ms. Chambers explained. She added that the report needs to be completed in the near future in light of the questions being asked today by regulators and attorneys general.

“Given the discussions recently in the media, as well as in our [online] e-group, there is a need to make sure our position on transparency is the most appropriate one and represents our members' needs and their positions,” said Ms. Chambers, who is the risk manager with the Waterloo Region Municipalities Insurance Pool in Kitchener, Ontario, Canada.

The seemingly sudden interest in contingency fees by prosecutors was prompted by the mutual fund scandal, according to Robert A. Rusbuldt, chief executive officer for the Alexandria, Va.-based Independent Insurance Agents & Brokers of America. He said complaints about the lack of transparency and disclosure of fees has drawn the attention of state attorneys general.

“Some attorneys general offices are drawing a parallel to the insurance industry, which I think is a false assumption,” said Mr. Rusbuldt. “They believe disclosure was not proper, or there was not enough disclosure, or the contingency fee structure was not appropriate. I think they will quickly find out sales incentive programs, based on profitability and volume, happen in every industry in America.”

Brokers are disclosing the fees, he continued, and they are dealing with sophisticated buyers who understand such arrangements. If the fees were not disclosed, he added, he could understand why there would be a problem. “I think right now they are in the investigative mode; the brokers and insurers are cooperatingmy only question is once they have the information, what are they going to do with it?” he said.

Mr. Rusbuldt said he hoped politics does not take over the investigation. “If they look at the facts,” he remarked, “they should conclude there is no issue here.”

Reproduced from National Underwriter Edition, May 28, 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.