RIMS Would Back Ban On Brokerage Fee Deals

In her testimony, Janice Ochenkowski, vice president of external affairs for the New York-based RIMS, said the corporate insurance buyer group and its members were "shocked" by recent allegations of illegal activities on the part of certain brokers and insurers in the placement of policies.

"We have been particularly distressed by the findings and allegations by Mr. Spitzer that insurance brokers have violated their position as a trusted advisor to their clients by steering clients to favored insurance companies and engaging in bid-rigging schemes," she told the Senate Subcommittee on Financial Management, the Budget, and International Securitya branch of the Senate Governmental Affairs Committee.

"These allegations have not only undermined the broker/client relationship, but they also have wider implications for the industry as a whole," she said. "Any penalties that may ultimately be levied against the companies involved should be used to offset consumer losses that have resulted from these deceptive practices."

Beyond supporting mandatory disclosure, however, "as the facts are becoming known and the investigation into placement service agreements continues, in an effort to address the potential conflict-of-interest issue, RIMS would support a prohibition on the use of placement service agreements by insurers and brokers," she added.

Regarding the NAIC proposal, which includes provisions for producers to gain permission in writing from their clients to receive compensation relating to the transactions from an insurer, Ms. Ochenkowski said, "RIMS believes that a national, uniform approach should be taken to address this issue. Regulatory clarity and uniformity are needed, not 51 different approaches."

(Over half of commercial insurance buyers are concerned that broker contingency commissions represent a conflict of interest and do not believe their brokerage firm fully discloses all sources of income related to transactionsyet surprisingly those same buyers are not interested in changing brokerages, according to a survey by Advisen Ltd. See story, page 25.)

Meanwhile, Robert Hunter, director of insurance for the Consumer Federation of America in Washington, speaking for smaller commercial and personal lines buyers, told the subcommittee that the lesson of Spitzer investigations is that Congress must stop considering bills that weaken consumer protections. "We urge Congress not to enact proposals championed by powerful segments of the insurance industry and the leadership of the House Financial Services Committee that would deregulate insurance," said Mr. Hunter, who was once Texas insurance commissioner.

The most prominent of these proposals is a "discussion draft" released earlier this year by Reps. Michael Oxley, R-Ohio, and Richard Baker, R-La., chairman of the Financial Services Committee, and its key Capital Markets Subcommittee, respectively, he said. "This proposal increases the federal role in insurance regulation while overriding many of the most important consumer protections that exist at the state level, such as the regulation of insurance rates," Mr. Hunter testified.

"This would leave millions of consumers vulnerable to price-gouging as well as abusive and discriminatory insurance classification practices," he said, adding that such legislation "would also encourage a return to insurance redlining, as deregulation of prices would include the lifting of state controls on territorial line drawing."

States would be helpless to stop the misuse of risk classification information for pricing purposes, such as credit scores, territorial data and the details of consumers prior insurance history, he said.

"The draft bill goes so far as to completely deregulate cartel-like organizations such as the Insurance Services Office and the National Council on Compensation Insurance, while leaving the federal antitrust exemption fully intact," Mr. Hunter charged.

Reproduced from National Underwriter Edition, November 18, 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.