Former NY Regulator Dinallo Rips Contingent Commissions

NU Online News Service, Sept. 11, 10:59 a.m. EDT

NEW YORK–Former New York Insurance Superintendent Eric Dinallo speaking at an industry conference yesterday said he believes producers' acceptance of contingent commissions from insurers is "a clear conflict."

Mr. Dinallo said he does not think regulators will abolish the use of such arrangements, but while the practice may not be illegal, it is one that should be watched closely.

A key to the continued use of contingents, he said will depend largely on whether consumers themselves speak out against the practice.

His remarks came on the same day that the New York Insurance Department posted new proposed regulations requiring producers to disclose to clients their compensation arrangements with insurers.

Mr. Dinallo made his comments during a Keefe, Bruyette & Woods Insurance Conference keynote speech that included comments on the prospect of federal insurance regulation and the possibility he may run for attorney general of New York.

Concerning contingent compensation arrangements, Mr. Dinallo noted that client backlash against them has not occurred to a large degree and while clients say they want a broker who does not take contingent commissions, they ultimately base their decisions on price, regardless of whether a broker accepts contingent commissions.

He said it will be "interesting to see if clients care enough or not."

Regarding why these commissions were not totally banned after investigations by former New York Attorney General Eliot Spitzer that turned up evidence of broker steering and price fixing in commercial insurance sales, Mr. Dinallo said that essentially, 50 state regulators could not agree that the practice should be outlawed.

The New York probe did result in four major brokers agreeing to drop such commissions.

Mr. Dinallo said it was a bit more difficult to generate public anger over the practice, since the clients who were victimized were institutional. It was not a "sexy" case of "Wall Street eats Main Street," he remarked.

On federal regulation, Mr. Dinallo reiterated statements made previously that the recent financial crisis was not an issue with insurance, and that it should not be "exhibit A" in the perceived need for federal regulation.

He said he could see a possible role for federal regulation of some insurance lines, such as reinsurance and bond insurance, but he added, "I don't think they do consumer [issues] all that well, historically."

Mr. Dinallo said insurers weathered financial crisis well because they had money behind their commitments, whereas other financial institutions basically created investment instruments that did not have adequate capital behind their obligations.

He said the financial crisis was a case where the "meek inherited the earth," as businesses like insurance with "predictable, boring returns" and no extreme outcomes endured the meltdown.

Concerning his possible entry as a candidate for attorney general in the Democratic primary, Mr. Dinallo said he has formed a committee to examine a possible run if Attorney General Andrew Cuomo does not seek reelection.

He said in the current environment, New Yorkers will pay close attention to a position like attorney general, and Mr. Dinallo talked up his experience serving under Mr. Spitzer, as well as his experience as a private attorney.

"I am proud and excited to be considered as a candidate if Andrew Cuomo doesn't run," he commented.