New York City
Producers' acceptance of contingent commissions from insurers is "a clear conflict," but the controversial practice is unlikely to be banned unless more clients object to it, New York's former insurance superintendent, Eric Dinallo, said at a recent industry conference.
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, he added.
The continued use of contingent commissions, 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 his observations 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. While commercial customers say they want a broker who does not take such compensation from carriers, they ultimately base their decisions on bottom-line price–regardless of how an insurer pays a broker, he added.
He said it will be "interesting to see if clients care enough or not" about such bonus fees paid to intermediaries based on the volume or quality of business delivered to a particular carrier.
Regarding why such commissions were not totally banned after investigations by his former boss, Eliot Spitzer, when he was New York's attorney general, that turned up evidence of broker-steering and price-fixing in commercial insurance sales, Mr. Dinallo said that essentially, 50 state regulators operating independently could not agree that the practice should be outlawed for all insurance intermediaries.
The New York probe did result in four mega-brokers agreeing to drop such commissions–Marsh, Aon, Willis and Gallagher–he noted.
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 once again emphasized that the recent financial crisis was not an issue with insurance.
He said the industry should not be "exhibit A" in the perceived need for federal regulation of financial services, despite the high profile in the meltdown of AIG–parent of many major insurers, now rebranded as Chartis. It was AIG's Financial Products unit, not its state-regulated insurers, that helped spur the crisis, he pointed out.
He said he could see a possible role for federal regulation of some insurance lines, such as reinsurance and bond insurance, but added, "I don't think they do consumer [issues] all that well, historically."
Mr. Dinallo said insurers weathered the financial crisis well because they had money behind their commitments, whereas other financial institutions basically created investment instruments that did not have adequate capital backing their obligations.
He said the financial crisis was a case where the "meek inherited the earth," as businesses such as 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 next year, 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 time as a private attorney–including a stint as general counsel of Willis.
"I am proud and excited to be considered as a candidate if Andrew Cuomo doesn't run," he commented.
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