Have No Fear On Fees, Agents Reassured

The question was front and center in a number of venues. In Orlando, the former head of a national regulator group said it is unlikely that strict fee disclosure regulations will eventually be imposed on independent agents.

Tough language requiring more disclosure about the compensation agents receive from insurers–part of a proposed National Association of Insurance Commissioners model law–was only an initial response to the contingency fee scandal exposed by New York Attorney General Eliot Spitzer and others, according to Mike Pickens, one-time NAIC president.

Mr. Pickens addressed agent concerns about the potential fallout from the Spitzer probes of Marsh, Aon and Willis during a panel discussion with three other NAIC ex-presidents during the National Council on Compensation Insurance annual meeting.

The former Arkansas insurance commissioner said the disclosure model–due to come up at the NAIC's June meeting–was a "knee-jerk" response to revelations about fee conflicts involving the country's top commercial brokerages and suggested it might not be the NAIC's final word on the subject.

Mr. Pickens–now with a Little Rock, Ark., law firm that does insurance regulatory work–said that "models don't matter until they are passed in state legislatures," noting that only Pennsylvania and Connecticut have put forward legislation to increase agent disclosure.

Former NAIC president Terri Vaughan–who was Iowa insurance commissioner before leaving for Drake University as an insurance professor–said that a number of insurance regulators are in agreement that it is not necessary to take action with legislation dealing with agent commissions.

Members of the ex-NAIC presidents' panel–which also included ex-North Dakota regulator Glen Pomeroy and George Nichols III, a former Kentucky commissioner–generally spoke in praise of probes by Mr. Spitzer that uncovered evidence of commercial brokerage bid-rigging, steering of accounts for insurer payoffs and insurer accounting misstatements to manipulate balance sheets.

However, Mr. Pickens complained that state attorneys general "want to criminalize behavior that was fairly well set in the industry," while Ms. Vaughan said Mr. Spitzer had made himself "almost a de facto national regulator."

Meanwhile, the chairman of the New York State Senate Insurance Committee told a group of insurance brokers he believes the misdeeds of large commercial brokers are not a reason for additional regulation of Main Street agents. Sen. James Seward, R-Milford, made his comments last week at a meeting of the Professional Insurance Wholesalers Association.

Little, "if anything," should be done in terms of legislation for the state's insurance brokers and agents to address bid-rigging and contingent fee abuses by large commercial brokerages that have been uncovered by Mr. Spitzer, Sen. Seward said.

The senator said he understands the difference between a large brokerage operation and a typical independent agent, adding he is confident that much of the state Senate also recognizes the difference.

He said that the actions of national brokers do not translate into the need for broad-based regulatory change. "Whatever is done legislatively, if anything, shouldn't be disruptive to an otherwise well-functioning market," he said.

Seth Lamont, a counsel for the senator, said Sen. Seward's comments have remained consistent since January when he first addressed the issue. Mr. Lamont said there are no bills pending in the state Senate to address contingent compensation. (However, bills have been introduced in the state Assembly, sponsored by Assemblyman Ryan Karbon, D-Rockland, and are in committee.)

Sen. Seward's comments mirror remarks by New York State Acting Insurance Superintendent Howard Mills, who said in late April that agents should be permitted to continue accepting contingent commissions.

Mr. Mills noted that agents are more reliant on the commissions than the mega-brokers and the practice at the agency level has not resulted in abuses seen among the mega-brokers. Mr. Mills added that greater disclosure was the answer, not abandonment of contingent commissions

"We recognize that everyone is not the same. One approach is not going to fit all," Mr. Mills said during a speech to the Advancement of Professional Insurance Women Network.

"I don't believe, as a regulator–and as a believer in our free-market system–that it's any of my business to tell the industry how they are going to compensate each other, provided we do what we have to do to protect consumers," he added.

Mr. Mills emphasized that the market already has answered the contingency fee question regarding the "Marsh's, Aon's and Willis's of the world. These brokers have already said they will no longer use them, and some of the biggest insurers have stopped paying contingent fees."

However, Mr. Mills said the same rule shouldn't apply to what he termed, "Joe Smith Insurance Agent." People recognize there is a difference between a mega-broker and a "Main Street broker," he added.

"I do a lot of traveling in upstate New York, and when I leave New York City, I am not dealing with Marsh's and Aon's. I am dealing with Joe Smith Insurance Agent on Main Street," Mr. Mills said. "For them, this is their life. This is how they make their living. We are not going to take that away."

For independent agents, the key is better disclosure, not abandoning contingent fees, the regulator said. "We are working on regulations, and our regulatory approach is disclosure and transparency," he added.

Mr. Mills also spoke about the latest focus of regulatory probes–potential misuse of finite reinsurance, calling this "a very serious problem." He defended his recent circular letter, which requires insurer chief executive officers to attest to the validity of all reinsurance contracts in force, and that "an actual transfer of risk has occurred [as] a just and reasonable response to a very serious issue."

His letter has been criticized by industry members as being overly broad and potentially difficult to comply with.

"I don't believe, as a regulator–and as a believer in our free-market system–that it's any of my business to tell the industry how they are going to compensate each other, provided we do what we have to do to protect consumers."

N.Y. Superintendent Howard Mills

Infographic, for page 6

Flag: Heard On The Street

Agent/Broker Differences May Save Fees

o N.Y. State Sen. James Seward said he understands the distinction between a large brokerage operation and a typical independent agent, and so does the legislature.

o "We recognize that everyone is not the same. One approach is not going to fit all," said N.Y. Superintendent Howard Mills. People recognize there is a difference between a mega-broker and a "Main Street broker," he added.

o Mike Pickens, former NAIC president, says a proposed NAIC model act on producer compensation was a "knee-jerk" response to the Spitzer revelations. "Models don't matter until they are passed in state legislatures," he noted.