In the wake of New York Attorney General Eliot Spitzer’s lawsuit against Marsh & McLennan and the nationwide review of insurance companies it has triggered, Rhode Island officials say a local review is being launched, and legislative reforms are likely.
But insurance agents here and across the United States say they’re worried that legitimate practices that support their businesses will fall victim to the crackdown, potentially saving carriers millions while agents and brokers take a hit.
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At issue are so-called “placement service agreements” (PSAs) and “contingent commissions,” both of which reward agents and brokers for steering business to a particular carrier. While customers know that exclusive agents for, say, Nationwide Insurance are paid by the carrier, they often don’t know if the independent agent from whom they solicit quotes will benefit financially if they sign with a particular carrier.
In Marsh & McLennan’s case, Spitzer alleges that the company – the nation’s largest commercial lines broker – faked and rigged bids from some carriers to persuade customers to go with insurers that paid it higher commissions.
Spitzer’s suit alleges that Hartford Financial Services Group, American International Group (AIG), Ace Ltd., and Munich-American Risk Partners were involved in the scheme. Other insurers, including MetLife and Liberty Mutual Group, have been subpoenaed for documents of their compensation payments.
As Spitzer continued to delve into the insurance world, both California and Connecticut have launched aggressive probes of their own. The National Association of Insurance Commissioners also jumped in, hosting several conference calls and forming a task force to coordinate a nationwide review and recommend reforms.
Rhode Island’s Department of Business Regulation is actively involved in the NAIC effort, said Joseph L. Torti, superintendent for insurance. And while alleged fraud is part of the probe, compensation schemes in general are being examined.
“There certainly is concern across the country on this issue,” Torti said in an interview Wednesday. “I think just about every state is involved in doing some type of investigation. … We’re trying to coordinate our efforts so we’re not all duplicating our efforts and we’re acting efficiently.”
Torti said he’s already spoken with officials at Rhode Island-based insurance companies, and he will soon send out a formal survey to them. By next month, he said, the NAIC task force is expected to have a proposal for model legislation to ensure that brokers properly disclose their compensation agreements.
That’s the part that worries the Independent Insurance Agents & Brokers of America. In a set of talking points labeled “not for general distribution,” but posted on the IIABA Web site, the trade group says it condemns “bid-rigging” and “supports prosecution of anyone engaged in it,” saying the “few bad actors who engage in these unlawful practices betray the public’s trust and unfairly damage the insurance industry’s reputation.”
But “commission payments and incentive compensation,” the document adds, “are a legal and effective means of compensating sales professionals in every industry.” On Oct. 8, the IIABA’s board of state national directors adopted a policy urging brokers with PSAs to disclose those arrangements to their clients and to “conduct business in compliance with applicable state and federal law.”
“The compensation structure, including initial and contingent commission, is not the problem – the problem is the alleged illegal activity to obtain that compensation,” the talking points say.
In an interview, Mark Matrone, the Rhode Island IIABA chapter president and an agent at John Andrade Insurance, focused on the latter point. He also stressed that there’s a difference between brokers, a rare breed in Rhode Island, and the state’s 206 independent agents.
Brokers are hired by the customer, and have a fiduciary duty to the customer. Agents work on the carriers’ behalf, connecting them with customers for whom they’re a good match. Contingent commissions, which are the more common payment type for agents, Matrone said, are based not just on how many policies an agent writes, but how good a risk those customers turn out to be, so the payments are more like profit-sharing. They are only paid for volumes above a certain level, and are not guaranteed.
“The bottom line is, every agent would like to have a contingency agreement with every company,” Matrone said. And when agents can’t make the cutoff to get those payments over a certain time period, they tend to stop doing business with the carrier.
But different customers work well with different carriers, Matrone said, and agents have an interest in being competitive, or else they’ll lose the customer entirely.
“We don’t really steer the business to different companies,” he said. “What we’re trying to do is get the best possible coverage at the best price for our client.”
Asked whether customers should know about incentives the agent is getting, Matrone replied: “I don’t think that’s any of their business.” If they don’t like the prices he quotes them, they can look elsewhere. “It’s up to the consumer to do their shopping.”
While among insurance commissioners, the talk so far is just of disclosure – not banning PSAs and contingency payments – at least one Rhode Island official wants to go further. In a recent news release, Secretary of State Matt Brown said he wanted to propose legislation to ban incentives altogether, describing them as “kickbacks.”
Brown, who Torti said has not communicated with the DBR, also called for a more aggressive investigation of local companies.
“Rhode Islanders need to know if the improper insurance industry practices taking place in New York are also happening here,” Brown said. “These incentive fees increase the cost of insurance, steer consumers to insurance plans that are not in the best interest of the consumer, but rather are the best financial deal for the broker, and hurt competition.”
Brown also said he will introduce a bill again next year to create an independent insurance commissioner position to oversee all segments of the insurance market, not just health insurance. Brown proposed the latter in the last legislative session, but the General Assembly created the position only for health insurance.
