No one knows for certain what regulatory changes will result from New York Attorney General Eliot Spitzer's investigations into unethical sales practices in the insurance industry.But, at press time, state policymakers had already drafted model laws requiring additional disclosure of broker compensation. And, not surprisingly, industry representatives were pleading for prudence.
The National Association of Insurance Commissioners (NAIC), Kansas City, Mo., released the Producer Compensation Disclosure Amendments to the Producer Licensing Model Act, and the National Conference of Insurance Legislators (NCOIL), Albany, N.Y., developed its Proposed Insurance Broker Fiduciary Duty and Conflict of Interest Model Law.
Both organizations drafted their models in November as a framework for discussions, but both were planning to finalize them by the time state legislatures assembled in January for the 2005 sessions.
The NAIC's initial model requires brokers to disclose all compensation arrangements and to obtain the insured's written consent before receiving compensation from an insurer (see "NAIC's Initial Proposals," page 12). NCOIL's original draft also requires broker disclosure of compensation, as well as fiduciary duty to ensure brokers protect the best interest of their clients.
"This is an emerging issue, grabbing attention just prior to many legislatures convening after the first of the year," said Craig Eilan, Texas representative and NCOIL president, when he introduced NCOIL's model.
"No one really knows the breadth and depth of the issue yet. However, we can't just sit still and wait, because many states are going to act one way or another on this," he says.
Indeed, insurance reform definitely will be on the docket for the states, as well as for Congress as it convenes this year. And industry representatives are concerned policymakers will act too hastily, passing laws that are onerous and ineffective.
"We support Mr. Spitzer's effort to address allegations of bid-rigging, which has no place in any industry," said Roger Schmeltzer, NAMIC's senior vice president of state and regulatory affairs in a Nov. 3 letter to Diane Koken, NAIC's president, and Steven Geller, president of NCOIL.
Yet, Spitzer has suggested industrywide corruption-equating bid-rigging and broker contingency agreements as legal and moral equivalents, he says. Under this kind of provocation, Schmeltzer believes it will be difficult for policymakers to be objective.
In addition to calling for prudence, industry representatives are also asking lawmakers to draw a clear, "bright-line" in whatever legislation they enact to ensure only commercial insurance brokers are covered.
The NAIC's model, even after it was revised after its winter meeting in early December, is still too vague, according to the Property Casualty Insurers Association of America (PCI), Des Plaines, Ill.
"Brokers, whether they are compensated by the company, the consumer, or both, represent the client in the transaction," says Robert Zeman, PCI's senior vice president, insurance regulatory affairs. "Agents, on the other hand, whether captive or independent, represent the insurer or insurers with whom they have contracts."
Who's a producer?
Similarly, the Independent Insurance Agents & Brokers of America Inc., Alexandria, Va., believes Section Two of NAIC's model, which requires all producers to disclose their compensation arrangements with consumers, is too broad and should be removed.
The Big I supports inclusion of Section One, which imposes new disclosure and client consent obligations on that segment of the industry where greater transparency is needed-commercial brokers, according to Robert Rusbuldt, IIABA's CEO, in a Dec. 1 letter to NAIC's Koken.
However, IIABA does not support Section Two, which requires all producers to disclose compensation arrangements. "The provision has the broadest possible scope," he says. "Yet, the current investigations of criminal misconduct and other wrongdoing have only revealed illegal behavior at the highest levels of the commercial marketplace."
Citing the industry's efforts to modernize by implementing electronic transactions, industry representatives also question the requirement of the NAIC's model for producers to obtain "written" consent from consumers before the producer receives compensation from an insurance company.
"We urge the NAIC to eliminate this requirement and instead permit brokers to use reasonable means to notify consumers," says PCI's Zeman.
Written consent forms will be difficult to obtain, increase transaction costs, delay policy issuance and require brokers to maintain reams of forms that have little value to consumers, he says.
Meanwhile, as the states wrestle with this issue, federal reforms to deregulate the insurance industry will be hot on the agenda for Congress this year, sources say. And Spitzer's investigations will factor into discussions, according to Deborah Smallwood, vice president of the insurance practice at TowerGroup Inc., a Needham, Mass.-based research and advisory firm.
The State Modernization and Regulatory Transparency (SMART) Act-which was introduced by House Financial Services Committee Chairman Mike Oxley, (R-Ohio) and Subcommittee Chairman Richard Baker (R-La.)-calls for pre-empting state rating laws and for creating a state-national insurance coordination partnership comprising members from the NAIC, the U.S. Treasury, the Securities Exchange Commission and the Federal Reserve.
"Because (Spitzer) is uncovering poor business practices and insurance is regulated by the states, there's the perception that deregulating insurance-federalizing it-will create healthy competition and better protect consumers," Smallwood says.
NAIC's Initial Proposal
The National Association of Insurance Commissioners (NAIC) in November drafted amendments to the Producer Licensing Model Act. One area addressed is broker compensation.
Specifically, the Kansas City, Mo.-based NAIC is proposing that insurance producers-and any business entity related to them-legally permitted to receive compensation from an insured can not receive compensation from an insurer unless the producer has: obtained the insured's written consent; and disclosed the amount of the compensation from the insurer-including commissions-and the method of calculating it.
In addition, all producers must disclose the following information, if applicable, to a client before a purchase:
* That the producer will receive compensation from an insurer for the sale.
* That the compensation may differ depending on the product and the insurer.
* That the producer may receive additional compensation from the insurer based on other factors such as premium volume and loss or claims experience.
Note: At press time, the NAIC was soliciting comments to its proposals. A revised draft was expected in the middle of December.
