Disclose All Compensation, But Dont Dump Incentive Pay

The industry comments will come in response to an NAIC proposal released on Nov. 16 to deal with alleged market manipulation and fee abuse being investigated by New York, Connecticut, California and other states. The NAIC reportedly wants to complete work as soon as possible on an amendment to its Producer Licensing Model Act so state regulators can show they are acting promptly and decisively to address the issues being probed.

The NAIC proposal says that "any insurance producer," whether broker or agent, would not be allowed to receive any payments from a carrier unless it is disclosed in advance to the insured and the insured has agreedin writingto the payment. Industry comments are due by Dec. 1 and a public hearing will be held on Dec. 4 as part of the NAICs quarterly meeting in New Orleans.

The NAIC initiative is also important to the industry, which is looking to head off more extreme reactions. For example, in testimony before a U.S. Senate panel, a representative of the Risk and Insurance Management Society said the corporate insurance buyer group would support the elimination of all contingent compensation arrangements.

Julie Gackenbach, vice president for federal government affairs at the Property Casualty Insurers Association of America, said she believes the NAIC "will come very close" to finishing up its work on the new regulation before its December meeting ends. "The ability to respond appropriately and in a timely way by state regulators is needed to demonstrate their ability to effectively oversee the industry," she said, adding that regulators are looking to prove themselves to Congress and consumers as well as the industry.

In addition, the NAIC is not operating in a vacuum, as the National Conference of Insurance Legislators has already drafted its own model law dealing with producer licensing. (See related story on page 7.)

Other industry officials and congressional staffers warn that the response by state regulators could determine how Congress reacts to the scandal, especially after the call at the Senate hearing by New York Attorney General Eliot Spitzer for Congress and federal investigators to join the probe.

Wes Bissett, senior vice president of government affairs at the Independent Insurance Agents & Brokers of America, said his group will express strong support for enhanced disclosures.

"We feel the NAIC in its proposed rule has identified the correct objectives, which involves bringing about meaningful transparency," he said. "Our hope is that any final model will provide clear, bright-line rules that are consistent on a state-by-state basis."

However, Mr. Bissett said IIABA will urge the NAIC to "proceed with care, to insure that these issues are thoroughly deliberated by the regulators. We want the regulators to avoid a rush to judgment and unintended consequences."

Mr. Bissett will tell the NAIC that the IIABAs main problem with the proposed rule is a provision in the first section calling for agents and brokers to estimate contingent compensation in their written disclosure to customers. "It is almost impossible for brokers to estimate what their contingency compensation might be," Mr. Bissett said.

"We would oppose any effort to end contingency commissions, but we strongly support disclosure," he added. "We believe that meaningful disclosure eliminates even the possibility of a conflict of interest, and contingent compensation also promotes good front-line underwriting."

Julie Rochman, senior vice president for public affairs at the American Insurance Association, said AIA believes "any new legal standards dealing with brokerage transactions must take into account the following principles: compensation transparency, regulatory clarity, jurisdictional consistency, and business flexibility."

She said AIA feels that while the latest NAIC staff draft "appears to be an improvement compared to other proposals, it still requires some clarification and tightening, so that it accurately reflects the transaction-focused, broker-only orientation that commissioner members of the NAIC Executive Task Force have described as their goal."

The Council of Insurance Agents & Brokers said it will also embrace disclosure. "We may suggest that in certain respects the obligations be broadened," said Scott Sinder, outside general counsel at the CIAB, and a partner at Collier Shannon Scott in Washington. Specifically, he said the CIAB will propose that the model law say a "generic" disclosure of industry compensation practices be given to all clients at the inception of a client relationship and at least annually thereafter.

"But we are still looking at the details, and what we are most concerned about is working with the NAIC to ensure that whatever they adopt is operationally viable," Mr. Sinder added.

PCI will work with the NAIC to tighten up language in the proposed regulation, noted Ms. Gackenbach. Specifically, she said, the proposal refers to "producers," while PCI will seek to have regulators "more definitively draw a line between agents and brokers." PCI would also like the NAIC to clarify the meaning of the word "compensation" in the regulation to account for disclosure of service fees paid to agents and brokers for inspections, audit controls and risk assessments.

Roger Schmelzer, senior vice president for state and regulatory affairs at the National Association of Mutual Insurance Companies, warned that the NAIC proposals scope "could result in serious administrative challenges."

Specifically, he said, "every transaction involving any payment to a producer would be subject to the required disclosures. Personal lines sales, such as a renters policy for very little premium, would be subject to the same disclosure as a commercial lines package policy with premiums totaling hundreds of thousands of dollars. That is a great deal of additional paperwork and its practical impact needs to be balanced with the immediate concerns."

Reproduced from National Underwriter Edition, November 24, 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.