Senate Hearing Spotlights Probes And Remedies State officials welcome a federal role in investigating brokerage practices
By Arthur D. Postal and Matt Brady
A hearing last week before a Senate panel on insurance brokerage practices is unlikely to be the last federal word on the growing investigation into agency and brokerage practices, say industry lobbyists, especially in light of comments by various state officials that some federal muscle would be helpful.
New York Attorney General Eliot Spitzer said Congress needs to look into the insurance industrys “Pandoras box” of problems.
Also at the hearing, Robert Hunter, director of insurance for the Consumer Federation of America, said the revelations of wrongdoing are not likely to stop with commercial property-casualty insurers and brokers.
“The Spitzer investigation so far has centered upon brokers, who work for the customer, as opposed to agents, who represent insurers,” Hunter testified. “It also has focused on the sale of commercial property-casualty insurance and not on personal lines, such as life, health, auto and home insurance. However, because financial conflicts of interest similar to those at the center of the Spitzer investigation exist in the sales of group life and health insurance and some personal policies, similar abuses in these areas may be uncovered.”
“Were finding these types of actions in other lines of business as well,” Spitzer said, adding that these acts create a “distorted incentive” for sales that drive premiums up.
Specifically, he said there have been instances in which agents dealing in personal lines have been offered stock or stock options by an insurance company, or even a loan, without requiring repayment depending on the agents sales.
Connecticut Attorney General Richard Blumenthal told the panel that his investigation into wrongdoing in the insurance brokerage industry, primarily dealing with the life and health industries, has “expanded significantly in size and scopeand continues to broaden and escalate.” (See story below.)
California Insurance Commissioner John Garamendi told the panel that as a result of his departments investigations thus far, “we have reason to believe this spills over into employee benefits.” (See story below and on page 8.)
New York Insurance Superintendent Greg Serio, who represented the National Association of Insurance Commissioners as chairman of its Governmental Affairs Task Force, told the Senate panel that state regulators are up to the task of regulating insurance, and unveiled a “three-pronged” program state regulators will implement to strengthen oversight of agents and brokers. (See story below.)
One lobbyist said, “I think the relevant committees will be closely watching the NAIC actions in December. If the NAIC comes up with a strong transparency standard that does not cause the industry to come unglued, I think there is a strong desire by Congress to help give them the tools to implement it.”
The lobbyist added, “In reality, I think the staff of the principal committees of jurisdiction took umbrage at the showboating nature of the hearing, and it is likely to make them want to contrast their own efforts as more thoughtful.”
In his testimony, Spitzer supported state regulation of insurance, but added, “Nonetheless, I do believe there is a role for the federal government, especially in the areas of offshore capitalization and investment by insurance companies.” At a minimum, he said, “federal involvement may be necessary to assure some basic standards of accountability on the part of insurance professionals.”
Spitzer endorsed the idea of giving the federal government the power to investigate the industry, although he said he could not support any amendment to the McCarran-Ferguson Act that would preclude the states from undertaking their own investigations. However, he said he would like “the additional scrutiny Congress can provide. Their investigative power is enormous.”
The antitrust issue also was brought up by the chairman of the subcommittee who convened the hearing, Sen. Peter Fitzgerald, R-Ill.
Additionally, Fitzgerald expressed dismay with a 1980 federal law that prohibits the Federal Trade Commission and other federal agencies from investigating the insurance industry, saying that doing so blinded the government to the conditions that led to the brokerage fee scandal.
“Declaring the FTC categorically unsuited even to peer at the insurance industry ignores the reality of national, indeed global, insurance markets, increasing consolidation in some market segments, and surges of centralized coercion that may not readily appear on the regulatory radar of any single state,” Fitzgerald said. “If we profess to favor free markets and other robust competition, then we must equally favor their civilizing predicates: antitrust law and transparency.”
In his testimony, CFAs Hunter also urged that the 1980 law removing the FTC from oversight of insurance activities be reversed and suggested that if Congress does move to establish a federal role for insurance, such a law should expand, not reduce, consumer protections.
Congress must stop consideration of bills that weaken consumer protection, as in the current language of legislation drafted earlier this year by the House Financial Services Committee, he said.
“We urge Congress not to enact proposals championed by powerful segments of the insurance industry and the leadership of the House Financial Services Committee that would deregulate insurance,” Hunter said. The most prominent of these proposals is a “discussion draft” released earlier this year by Reps. Michael Oxley, R-Ohio, and Richard Baker, R-La., chairman of the Financial Services Committee, and its key Capital Markets Subcommittee, respectively, he said.
“This proposal increases the federal role in insurance regulation while overriding many of the most important consumer protections that exist at the state level, such as the regulation of insurance rates,” Hunter testified.
While insisting that the states would go to the mat to retain their oversight over insurance, Serio and Blumenthal both outlined areas where the federal government could play a role in the investigation.
Serio said that any federal muscle that could be added to an investigation of the insurance industry would likely prove helpful.
“Whether its the FTC or the Government Accountability Office, the opportunity for the federal government to investigate the insurance industry is not necessarily a bad thing,” he said. Congress already has become a “regular partner” in industry issues, he said, noting the current efforts by Oxley and Baker to reform the state-based regulatory system.
For his part, Blumenthal said, “Congress should examine whether any federal agency has used brokers or agents to purchase insurance and whether any illegal steering or bid-rigging occurred in these federal transactions.” But he called “any preemption [of state investigative authority] an anathema.”
While most industry officials believe the revelations about conflicts of interests and other wrongdoing by brokers will slow the momentum for an optional federal charter, one trade group official voiced an opposing view.
Steve Bartlett, president and CEO of the Financial Services Roundtable, said recent activities and the subsequent Senate hearing reflect, in part, “the inability of an archaic regulatory scheme to keep pace with the complexities of the financial services sector.”
He said in a statement after the hearing, “We have a marketplace for financial services that knows no state or national bounds, and it is increasingly apparent that the state-only system is not capable of serving the needs of interstate or nationwide insurance providers.”
Bartlett contended, “It seems starkly obvious that a strong federal regulatory system is needed, especially when we have a system that currently allows for one states attorney general to dictate what is happening for everyone else. Federal regulation is necessary for a national marketplace.
The case for a federal chartering option “is overwhelming,” he said, “and the benefits would be substantial. There is a consensus among all stakeholders that the current system is broken and needs to be fixed. We believe an optional federal charter is the best way to do this for the benefit of consumers across the country.”
Reproduced from National Underwriter Edition, November 18, 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.