The National Association of Insurance Commissioners has adopted model legislation that, if passed in individual states, would require insurance brokers in those states to disclose to consumers how they are compensated by carriers for selling their products.
The model law, approved during a members’ conference call on Wednesday, is part of the NAIC’s response to the brokerage scandal triggered by New York Attorney General Eliot Spitzer’s investigation of Marsh & McLennan and other firms.
Spitzer’s probe, which sparked investigations in other states and then nationwide, uncovered alleged bid-rigging and other deceptive practices by brokers who, unbeknownst to their clients, had a financial interest in placing business with specific carriers because of the commissions those carriers offered them.
Many in the insurance industry and on Wall Street have characterized Spitzer’s crusade as a witch-hunt, and the level of support for his actions varies dramatically even among state insurance officials.
In Rhode Island, the state Department of Business Regulation has begun probing broker compensation, and insurance superintendent Joseph L. Torti III has even said he might consider banning certain broker incentives, but only Secretary of State Matt Brown has fully embraced Spitzer’s actions and called for major reforms.
Efforts to reach Torti this week have been unsuccessful, and it’s unclear whether he or DBR Director Marilyn Shannon McConaghy were involved in the NAIC vote to approve the model legislation.
The measure resulted from the work of the NAIC Executive Task Force on Broker Activities, which was charged with creating more transparency for insurance consumers through better disclosure of broker compensation arrangements; helping state insurance regulators to address improper conduct by brokers and insurers through a coordinated investigation and collection of information, and implementing a new online fraud reporting system.
The model law would require, among other things, that brokers disclose the amount of compensation from the insurer and the method for calculating the compensation, including any contingent compensation. In those cases where the contingent commission is not known, brokers would be required to provide a reasonable estimate of the amount and method for calculating such compensation. Producers who represent companies and do not receive compensation from customers would have a duty to disclose that relationship in certain circumstances. A draft of the law is available at www.naic.org.
The NAIC had held a public hearing at its winter national meeting earlier in December to get public comment on the proposal, and committed to adopt a model law by the year’s end.
“We made a promise to consumers and industry to get to the bottom of this matter as quickly as possible, resolving to develop and put into place a tangible action plan for state insurance regulators,” said NAIC president/Pennsylvania Insurance Commissioner Diane Koken, who also chairs the task force. “With passage of this model legislation, we are delivering on that promise.”
Along with approving the model law, the NAIC members also asked the task force to further consider additional requirements, such as recognizing a fiduciary responsibility of insurance producers, disclosure of all quotes received by a broker, and disclosures relating to agent-owned reinsurance arrangements.
