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Regulators Weigh In

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State insurance regulators are following up an announcement of a plan to investigate brokers fees to see if a problem exists and to regulate these fees to prevent future wrongdoing.

Diane Koken, president of the National Association of Insurance Commissioners, Kansas City, Mo., detailed plans worked out by commissioners to address any brokerage problems that come to light after a planned investigation.

Koken also defended the work of state insurance regulators. “Federal oversight would not have caught [alleged abuses] faster than the states.”

The New York insurance department has been working with Attorney General Eliot Spitzers office, she adds. In fact, she continues, both the New York and California insurance department had received a letter expressing concern about alleged mispractices in February and had started an investigation but had not gathered sufficient evidence to proceed, Koken adds.

She says federal lawmakers have not been in contact with her regarding the issue or its impact on the debate on federal regulation of insurance.

The immediate work of regulators has already started with the selection of a group of 13 state commissioners to investigate the issue, she says. That group includes Illinois, California, New York, Texas, New Jersey, Georgia, Connecticut, South Carolina, Pennsylvania, Oregon, Maine, Montana, and Missouri.

Prong 1 of a 3-prong approach the group plans is the “expeditious development of a model regulation for broker disclosure. Had there been greater transparency, there might not have been the structure to do alleged bid-rigging.”

This prong will focus on disclosure for broker compensation, she says. Whether or not broker will be defined to include an agent still needs to be discussed, she says. In Oregon, because of state requirements, the term broker in a proposed regulation that could be effective next month would include an agent.

Proposed regulations, including the pending one in Oregon and one in California, will be looked at along with all other available templates in developing the model regulation, Koken says.

Prong 2 will involve fact gathering, she adds. “We recognize that we still dont know the facts: whether it is one line, all lines, certain companies, certain regions, certain states. There needs to be a fact-finding effort.”

The fact gathering will be similar to the approach used for the race-based premium issue and the Y2K fact finding project, she says. The race-based premium issue concerns unlevel premium charges because of race and the Y2K issue concerned company IT program readiness.

Based on findings, targeted examinations would be undertaken, she adds.

The third prong is a Jan. 1, 2005 launch of an NAIC online fraud reporting site that anonymous tipsters could go to, Koken explains.

Kokens assertion that regulators were on top of the brokers fees issue was assailed by Birny Birnbaum, executive director of the Center for Economic Justice, Austin, Texas, and an NAIC funded consumer representative.

In a letter to Koken, dated Oct. 27, Birnbaum said that “with the latest insurance industry market conduct problem, consumers once again see not only the failure of state insurance regulation to protect consumers but the refusal of state insurance regulators to take responsibility for their failure

“The broker fee scandal is the latest in a line of major insurance market conduct abuses NOT discovered by state insurance regulators.” Birnbaum cites “life insurance churning and replacements, race-based premiums, single premium credit insurance, insurance credit scoring and more.”

Birnbaum asserts that the state-based market conduct surveillance system is incapable of identifying problems and protecting consumers. “How could such a bid-rigging system escape the notice of regulators in 51 jurisdictions for years? More troubling, did regulators know about contingency fees and simply decide it was not a problem worth addressing?” He called that possibility “a distinct reality.”

“As with other major market conduct problems that regulators were late to the dance for, the regulators should take responsibility for the failure, admit the problem should have been found and stopped sooner, and study why their market conduct systems failed to surface these problems,” Birnbaum says.

Birnbaums solution calls on regulators to hire an independent consultant to report on the issue, review rate and form model laws, and create greater transparency with disclosure of all agent and broker fees and commissions.

Jim Connolly

Reproduced from National Underwriter Edition, October 28, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.