The brouhaha over American International Group's lavish junket for top-performing agents, coming so soon after its federal bailout, raises more than narrow questions of propriety, instead going to the heart of the debate over agent compensation and conflicts of interest.
The party is literally over at AIG, as the beleaguered company scrapped plans to host a second bonus resort conference to reward agents in the wake of a tsunami of criticism. AIG was hammered for throwing life producers a $400,000-plus celebration after begging Uncle Sam for an $85 billion bailout loan–returning for another $37.8 billion to keep the organization afloat.
Such incentive programs are standard operating procedure, but AIG was politically tone-deaf to go forward with its retreat for loyal agents right after nearly going under and threatening to take the entire financial system with them. The criticism from Washington was fast and furious.
"Average Americans are suffering economically," said Henry Waxman, D-Calif., chair of the House Oversight and Government Reform Committee that grilled AIG executives about how its crisis came about. "They are losing their jobs, their homes and their health insurance. Yet less than one week after the taxpayers rescued AIG, company executives could be found wining and dining at one of the most expensive resorts in the nation."
AIG's new CEO, Ed Liddy, tried to defuse the controversy with a letter to Treasury Secretary Henry Paulson, explaining that the event at the St. Regis Monarch Beach Resort in Southern California was not for senior company executives but for top-selling life producers.
But that explanation really came across as lame in the midst of the meltdown on Wall Street, which is no doubt why the company decided to cancel another event for property-casualty agents scheduled at the Ritz-Carlton by California's Half Moon Bay.
Mr. Liddy wrote that going forward, AIG understands its situation has changed, and that "we owe our employees and the American public new standards and approaches." No kidding!
But to address the broader issue, even if AIG's financial woes hadn't occurred, these types of junkets are ethically questionable in the eyes of industry watchdogs.
J. Robert Hunter, insurance director at the Consumer Federation of America, e-mailed me shortly after the lambasting AIG took, noting even though the event that did go forward was geared toward agents and not company executives, "this is worse than [doing it for] employees, since hidden producer rewards is what [New York's former attorney general, Eliot] Spitzer nailed AIG for in the first place."
Paying hundreds of thousands of dollars to treat producers to a week at a swank resort begs the question: Are supposedly independent agents really placing their clients with the company offering the best product and service at the best price, or just with the carrier that will send them to the nicest vacation resort?
If indeed AIG offers the best deal, then that should win the day in the free market. Agents should receive a commission (or, better yet, a fee straight from the buyer) for their work. Any additional "incentives" from carriers–like doling out spa treatments while policyholders lose their shirts in the stock market–comes across as bribes to lure agent placements.
It's time to really play it straight with insurance buyers–both commercial and individual. That means full disclosure of all compensation–bonus vacations included. If agents and brokers hesitate to tell clients all they receive in return for doing business with insurers, the question then becomes: What are they ashamed of?
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