Regulators Agonize Over Broker Fee Rules

NAIC members have been moving to improve broker fee disclosure since last October, when an investigation by New York Attorney General Eliot Spitzer produced a lawsuit amid allegations that brokers selling commercial insurance rigged bids and fixed prices with insurers in return for undisclosed payoffslisted as contingency fees and placement agreementsto steer customers to various carriers.

The NAIC has already apparently put aside regulatory language that would impose fiduciary responsibilities on agents and brokers and require them to find the most suitable coverage for clients, but they are being pressed by insurance trade groups to eliminate various disclosure requirements.

"It seems that it all comes down to disclosure now," said NAIC Vice President and Oregon Insurance Administrator Joel Ario in remarks at an NAIC hearing seeking insurance industry and consumer input on what further actions regulators should take.

Agent and company representatives urged regulators not to expand the scope of the broker fee disclosure model the NAIC approved last December, which essentially limits coverage to producers who are compensated by both the insured and the insurer, along with those brokers who hold themselves out as representatives of the insured even if they receive no compensation from buyers.

Regulators are considering requiring fee disclosure for all producers. They also have the option of paring back the amendment to cover only doubly-compensated brokers to keep the measure in line with a model approved earlier this month by the National Conference of Insurance Legislators.

Mr. Ario said regulators were reluctant to exempt producers who, while they may not receive compensation from the insured, act as brokers in every other sense. "These were some of the brokers who were involved in some of the illegal activities in New York," he said.

One possible area of compromise could limit disclosure requirements to those transactions above a given figurewith $250,000 in premium serving as the initial starting point. Representatives of both the Independent Insurance Agents & Brokers of America and the National Association of Professional Insurance Agents, who oppose the current NAIC model, said such an approach might win their backing.

One of the six questions posed by the NAIC for comment was one concerning the potential ramifications of banning contingent commissions. Such compensationfor all intents and purposes at the heart of Mr. Spitzer's investigationhave been banned in settlement agreements reached by state regulators with New York-based Marsh and Chicagobased Aon. The firms represent more than half of the commercial brokerage market.

However, company and agent representatives urged that such a ban not be incorporated into the model since most "Main Street" personal lines agents have different forms of contingency agreements they say do not create the conflicts inherent in the Marsh and Aon deals.

"Contingent commissions can result in the buyer being able to enjoy products and more favorable pricing, terms and conditions than otherwise might be available," said Robert Zeman, senior vice president of the Property Casualty Insurers Association of America. "Banning incentive compensation could take from the consumer those products marketed by insurers wishing to have their producer force act to one degree or another as field underwriter."

Funded consumer representative Birny Birnbaum, executive director of the Center for Economic Justice in Austin, Texas, urged regulators to require disclosure of all compensation to create disincentives for carriers and producers to "game the system" by switching methods. "Producers and insurers are rabid in their defense of the status quo," he said, adding that personal lines compensation schemes also presented ripe opportunity for agents to act in their own, rather than the client's interest.

Some regulators expressed frustration at attempts to expand the scope of the legislation beyond large commercial brokers. This aspect of disclosure represents a mere tempest in a teapot," said Montana Commissioner John Morrison, speaking of purported personal lines conflicts.

So far, the NAIC disclosure model has been introduced in only Connecticut and Pennsylvania. Wes Bissett, senior vice president of the Alexandria, Va.-based IIABA, said any further expansion of the model would doom its chances of passage in more states.

Mr. Ario countered that many states are reluctant to take legislative action while both criminal and regulatory investigations are still underway.

Reproduced from National Underwriter Edition, March 17, 2005. Copyright 2005 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.