Regulators Grapple With Broker Fee Oversight

Under discussion is an amendment to the NAIC model law regulating producers. The proposed measure, in part, would require more disclosure of compensation sources and contingencies.

Despite the conflicts here, regulators at the NAIC meeting said they are still intent on crafting a compromise measure in time for approval before Christmas, so it can be included next year on state legislative agendas.

Montana Insurance Commissioner John Morrison, commenting on the proposal, said corruption and fee transparency were two different issues. "So let us deal with the issue of corruption that is threatening the reputation of the NAIC and the industry itself," he said.

However, consumer representatives and other regulators wanted a more expansive treatment of compensation reflected in the model.

Last October, Attorney General Spitzerwho announced last week that he will run for governor in 2006filed a lawsuit against Marsh, alleging bid-rigging and other anti-competitive violations. While not directly related, it was disclosed that the brokerage received an estimated $800 million in contingency fees from carriers based on the amount of business it steered to specific carriers.

Although industry trade groups contend that such fees were legitimate and have always been disclosed, the major insurers announced they will stop paying them, and Marsh, Aon and Willis said they will stop accepting them.

At the NAICs regularly scheduled public hearing on the model on Dec. 4, regulators clashed over how endemic wrongdoing is in the industry.

Gary Cohen, the California Insurance Departments general counsel, suggested the NAIC was slow to react to the problem. While asserting disclosure was not enough, he was not specific as to other measures that should be taken.

A second session was held on Dec. 6 to better reach a consensus after rumors of a sharp exchange on Dec. 5 between California Insurance Commissioner John Garamendi and NAIC President Diane Koken, commissioner of Pennsylvania, during a closed-door Commissioners Roundtable.

The revised model is divided into two sectionsA and Bdealing with brokers and agents, respectively. However, defining the distinctions and duties of the two sectors, and the amount of disclosure needed for each, took up most of the special session on Dec. 6.

While brokers are often compensated on a fee basis by the prospective policyholder, and agents by their respective carriers, there are enough exceptions to make an all-inclusive definition almost meaningless, various parties argued here.

Audrey Samers, the New York Insurance Departments general counsel, said many of the brokers under investigation in her state are compensated only by carriers, and she leaned toward including both parties in the disclosure requirement. However, Mr. Morrison of Montana and Georgia Insurance Commissioner John Oxendine pushed to limit this model to brokers in Section A, and work on the other issues sometime next year.

Since policyholder compensation was criticized as too limiting a definition to distinguish among producers, regulators considered using a test of "acting on behalf of the client" to better define the broker role and determine disclosure requirements.

However, William Anderson, representing the National Association of Insurance and Financial Advisors, said any resulting need for his members to disclaim their actions on behalf of their clients could result in losing sales. "Well, if that is the case, then I think you should all be included in it," said Mr. Oxendine.

Wes Bissett, vice president of state government affairs and state relations for the Independent Insurance Agents & Brokers of America, said that perhaps different levels of disclosure could be required for the two producer sectors, but only after a sharp delineation is made. Since brokers don't receive carrier appointments, that was suggested as a defining feature.

Mr. Morrison suggested adding the phrase "in the best interest of" to a definition for brokers as is proposed in the model put forth by the National Conference of Insurance Legislators. However, such phrasing would impose a fiduciary duty on brokers that does not exist in a general sense, it was noted by Mr. Cohen of California.

Industry representatives noted that with an estimated 3,500 carriers in the market, acting "in the best of interest of" a prospect can be nearly impossible to quantify, since price is merely one small piece of the puzzle in the complex world of commercial insurance. The trade group representatives argue that adding complexity to a new and allegedly fuzzy disclosure requirement will be an invitation for lawsuits.

It also remained unclear whether NCOIL would water down its more stringent broker fee proposal to be able to back the NAIC measure, as it did earlier with a market conduct model law. NCOIL President Craig Eiland said he would have to wait until next week to see what document finally emerges from the NAIC before speculating on that possibility.

Regulators must also grapple with what form of acknowledgement the disclosure will require, and also how much should be disclosed. The current draft calls for the exact dollar amount, but that might not be possible for contingency fees when a policy is sold.

Reproduced from National Underwriter Edition, December 10, 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.