Dissension In The Ranks
The producer community has taken it on the chin the past two years, after brokers at the biggest firms were found by New York Attorney General Eliot Spitzer to be rigging bids in return for lucrative contingency fees. The major brokerages were quick to strike deals with Mr. Spitzer, setting aside settlement funds for disgruntled policyholders, dumping contingency agreements and vowing to be more open with buyers.
Unfortunately, Main Street agents were trapped in the backlash. State regulators caught asleep at the wheel by New York's crusading gubernatorial candidate raced individually and collectively to prove they were on top of the scandal.
The National Association of Insurance Commissioners and the National Conference of Insurance Legislators scrambled to come up with regulations, but after battling with the industry over how far to go, compromised with models calling for limited disclosure. However, despite the initial hubbub, even those modest initiatives failed to catch on among the states.
One of the most aggressive responses came from an old industry nemesis–California Insurance Commissioner John Garamendi, who pressed for a serious regulatory upgrade. The biggest threat was his move to impose fiduciary duties on brokers, in addition to wide-ranging disclosure mandates.
However, after Mr. Garamendi's proposed regulatory reforms were thwarted by producer groups, the commissioner cut his losses and signed on to a self-regulatory initiative launched by the Insurance Brokers and Agents of the West. The commissioner announced he would put off developing his own rules to see how guidelines offered by IBA West play out.
The IBA West document, as reported by our own Matt Brady, urges agents to disclose the source and type of any compensation and how it might be triggered. It also suggests that producers provide information about all quotes obtained–particularly if compensation from one carrier offering a quote would be greater than that of another insurer in the bidding.
Mr. Garamendi's surrender was not unconditional. "The Department of Insurance will watch carefully to see whether the various efforts to deal with this problem, including the suggestions contained in IBA West's Guide, are widely adopted by agents and brokers, and what benefits they provide to consumers," he said.
He also warned that "we are continuing with our investigation, and will bring enforcement actions against any agents, brokers or insurers we find to have violated the law by bid-rigging, steering or failing to disclose material information to consumers."
That seems fair. Rather than go overboard with oppressive regulations, let's see if the industry can clean up its own mess.
Unfortunately, the IBA West's solution is not as neat as it seems. There is already dissension in the ranks. The rival Alliance of Insurance Agents and Brokers, while "pleased" Mr. Garamendi is holding off on trying to promulgate his own regulations, is voicing concern that the agreement with IBA West could hurt the industry over the long term.
The Alliance's gripe is that the deal in effect recognizes Mr. Garamendi's authority to act in this area–a point the group does not concede at all. Also, by publishing its "guide" with the commissioner's blessing, they fear it represents de facto regulation, while opening producers up to new liabilities they should not have to face.
Outside of Mr. Spitzer's New York extravaganza, this is the most important battle in the country over producer compensation. Mr. Garamendi has given the industry all the rope it needs to solve its own problem. It would be a shame if the industry uses that rope to hang itself.
Sam Friedman is NU's Editor-In-Chief. He may be reached at sfriedman@nuco.com.
"Commissioner Garamendi has given the industry all the rope it needs to solve its own problem. It would be a shame if the industry uses that rope to hang itself."
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.