New York Superintendent of Insurance Greg Serio has responded to criticism that state regulators botched their investigation of brokers’ fees and alleged bid-rigging.[@@]

State insurance regulators have actively worked on the matter of broker compensation since November 2002, when they sent out 13 requests for information, Serio asserts. A second round of over 100 requests followed, he says.

The New York department has been working with the New York attorney general’s office during that time, he says. However, the department deferred action because of a “pecking order” of criminal, civil and then regulatory priorities, he says. Regulatory action cannot interfere with any investigation that may lead to the filing of criminal indictments, he explains.

Once a civil suit is filed, regulatory action could be taken. Serio argues that such action is being taken, as evidenced by a scheduled Nov. 23 department hearing to address the issue.

When asked if his agency will conduct market conduct examinations, Serio says that he is “leaving all regulatory options open.”

Serio says that he has not spoken to representatives of Congress on the broker issue yet, but is “clearly mindful” that it will affect the State Modernization and Regulatory Transparency Act.

[The SMART act, currently being considered in Congress, would require states to streamline insurer licensing rules within 3 years to make it easier for an insurer licensed in one state to apply for a license in other states. It would also simplify state market-conduct examinations.]

When asked whether the investigation into broker fees was an argument for federal regulation, Serio says state regulators and the attorney general’s office “were the ones who rooted this out. This whole thing is not a referendum on the effectiveness of state regulation. Federal regulation will not solve the problem.”

What is needed is a better corporate governance structure and greater power for state insurance regulators so that they can examine the interplay between corporate operations and not be limited to looking at licensed insurance entities, he says.

New York will seek an expansion of authority, and the NAIC has started to look at this option, he adds. This added authority would update insurance law to reflect the current market, Serio adds.

Serio says that in the life industry, the Insurance Marketplace Standards Association, Washington, has made strides in the last several years, but it would need 100% participation among life insurers to be effective.

When asked how the industry could be left to police itself, Serio says that self-policing would not substitute for regulatory oversight but rather would be a first step. It would be similar to the way that the National Association of Securities Dealers and the Securities and Exchange Commission work, he explains.

Serio also asks why brokers, carriers and insurance customers did not come forward voluntarily if they knew of a problem.

The effectiveness of state insurance regulation was assailed by Birny Birnbaum, executive director of the Center for Economic Justice, Austin, Texas, and a funded consumer representative with the National Association of Insurance Commissioners, Kansas City, Mo.

In a letter dated Oct. 27 to Diane Koken, NAIC president and Pennsylvania insurance commissioner, Birnbaum stated, “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.”

Birnbaum wrote that the broker fee scandal was the latest in a number of major market conduct abuses state insurance regulators failed to uncover. They also missed life insurance churning and replacements, race-based premiums, single premium credit insurance and insurance credit scoring, he argued.

“How could such a bid-rigging system escape the notice of regulators in 51 jurisdictions for years?” he asked. “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.”

Birnbaum demanded that regulators take responsibility, admit they should have recognized and acted on the problem sooner and study why they didn’t spot it.

He 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.