Insurers To NAIC: Target Changes On Broker Comp

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In advance of a public hearing that the National Association of Insurance Commissioners will hold to get feedback on its plan to halt abuses in how commissions are levied on consumers, interviews found that one of the comments likely to be repeated is that the NAIC needs to keep any action targeted on the actual problem.

The NAIC is having its winter meeting this week in New Orleans. A public hearing was planned for Dec. 4 to discuss a plan that a task force of commissioners developed in mid-November after attorneys general including New Yorks Eliot Spitzer and Connecticuts Richard Blumenthal launched an investigation into the practices of insurance brokers and companies. California Insurance Commissioner John Garamendi and New York Insurance Superintendent Greg Serio also are conducting investigations on the matter.

Allegations include conflicts of interest as well as bid-rigging. The inquiries started with commercial lines of insurance and spread to include group life and health contracts.

The commissioners response includes sending out inquiries to companies requesting information on commissions and bidding practices, amending guidelines in the Producer Licensing model act, and establishing a consumer outreach program where potential abuses could be reported.

Among those testifying at the hearing will be the American Council of Life Insurers and the National Association of Insurance and Financial Advisors, both in Washington; the National Association of Mutual Insurance Companies, Indianapolis; and, the Property Casualty Insurers Association of America, Des Plaines, Ill. At press time, all were finalizing their comments in preparation for the hearing.

Bruce Ferguson, ACLI senior vice president-state relations, noted the scope of the response, which covers all lines and types of insurance. A “one size fits all” approach can be very complicated because of the different ways insurance is sold in the property-casualty and life markets and the different types of producers such as captive and independent agents, he notes.

The ACLI is encouraging the NAIC to focus on the fact pattern in the Garamendi and Spitzer investigations, he adds.

Ferguson also says that if states send out inquiries to companies and producers, they should follow a uniform template so that there will not be duplication of efforts as these entities seek to respond to state regulators. The template developed by the NAIC is a “laudable goal” and should be adhered to, he adds.

To date, however, the result is somewhat mixed, he continues, with a handful of states including Illinois, Ohio and North Carolina deviating somewhat from the NAIC template, while states such as Delaware and Iowa are using it.

NAIFA is preparing comments that it will present at the hearing, says Jim Edwards, NAIFA spokesman. “We dont support the proposal in its current form and will make suggestions [at the hearing].”

Peter Bisbecos, NAMICs legal and regulatory affairs director, also called for regulators to remain focused on broker issues. For instance, he says it appears that captive agents could be covered when, in fact, it is known how and where their compensation is made.

Another concern he raises is uniform interpretation of any amendments to the model that is finally adopted so that there are not 20, 30 or 40 interpretations.

Bisbecos also raises concerns about how information that companies provide will be treated. The concern is that there could be a violation of legal rights against compulsory self-incrimination, he adds. If information were to be passed on to an attorney generals office and a case was initiated, then it would be an instance of forced self-incrimination. It also could hurt an attorney generals case against a company, Bisbecos says.

Robert Zeman, PCIs senior vice president-legal and regulatory affairs, says there is still more work to be done on the model. “There is a need to “focus on the role of the brokers and sharpen the area of where the true problem has been.”

Mike Koziol, PCIs assistant vice president and counsel, says a client has the right to know if his broker is accepting compensation from a carrier. Koziol says the traditional concept of agent-principal can be used.

The NAIC did take a reasoned approach, Koziol says, but it needs to look at points such as requests for specific computations and written disclosure. He says it is more important that the consumer knows there is also compensation from the carrier than it is for specific disclosure of a compensation formula. And, he continues, disclosure in writing can be an “administrative nightmare.”

Zeman notes that uniformity is also important. For instance, he says they are hearing from member companies that in Washington state, the turnaround for responses to inquiries is 20 rather than 30 days, which makes a big difference for a company.

Birny Birnbaum, executive director of the Center for Economic Justice, Austin, Texas, says “the NAIC is not addressing the systemic problem with state regulation. It is more like damage control.” Why does it take a broker scandal to prompt action? he asks.

An independent analyst should be hired to determine problems, he continues. The “dominance of the insurance industry over state regulators” is another point Birnbaum says he will raise. The presumption, he says, is that if you are a state regulator, you are going to go and work in the industry and there is something “fundamentally wrong” about that premise.

He says that with commission structures that often are 50% or more of a first years premium, it is hard to understand how regulators could not determine earlier that there could be problems with compensation. The current system of regulation is “structurally incapable of identifying market conduct problems,” he continues. He cites the sale of annuities to seniors and asks why a regulator couldnt approve a policy form with a stipulation that limited sales above a certain age unless an independent financial advisor was consulted.

It is “disappointing” that the response state insurance regulators offered to the broker compensation scandal is that state insurance regulation works and federal regulation would not have done a better job, Birnbaum asserts. “Who cares whether or not federal regulators could have done a better job. We want state regulators to do a better job.” Birnbaum concludes that until state regulators take responsibility for failures in the system, they cannot begin to fix it.


Reproduced from National Underwriter Edition, December 3, 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.