UBIQUITOUS PURVEYORS OF PROTECTION, THE
It will be miraculous if the world of the insurance broker and agent comes out unscathed because of the accusations that were leveled at major brokerage firms (principally Marsh & McLennan) of fraudulent activities in the placing of business using truly abhorrent tactics. That was clear from the onset last fall, when New York Attorney General Eliot Spitzer announced an investigation of “bid rigging” by Marsh, calling it a calculated scheme to justify the placement of risks without regard to the best interests of insureds.
The attorney general, who had already made a name for himself by, among other accomplishments, uncovering illegal activities in the securities industry, and thereby shutting down an after-hours trading mechanism, had little difficulty getting the Marsh story onto front pages, where it stayed for many months. Spitzer purportedly began his probe after a whistle blower alerted him to alleged wrongdoing. Through subpoenas and staff investigators, evidence of collusion was uncovered that Spitzer said implicated Marsh, other major brokers and companies including AIG, The Hartford and Zurich. His actions were so swift and direct that several Marsh employees entered guilty pleas and Jeffrey Greenberg, chief executive officer of Marsh, unceremoniously resigned. One guilty plea entered by a Marsh executive was for engaging in the crime of fraud in the first degree, a Class E felony calling for jail time.
While the story became public in mid-October, the probe by Spitzer had evidently been underway for some time. That is clear because on October 14, as attorney for the State of New York, he filed his civil action against Marsh & McLennan Companies and Marsh, Inc., in Supreme Court, New York County. The news stories about his action included statements from his office that played on the words “bid rigging” and the element of “contingent commissions.” It also became known that his office had served subpoenas on other brokerage firms, some of whom were not in the “major” category. Up to the time of the completion of this column, only Marsh was made party to suit by the state. The details of the 17-page complaint, which called for severe penalties against the brokerage firm, including punitive damages, could well have been a criminal indictment in the same manner as the guilty plea because it cites fraudulent actions and violation of the antitrust laws.
Spitzer did not limit his attack to Marsh’s violations. He called into question the competence of state regulation, making a very strong pitch for federal supervision of the business. In this regard, it’s the opinion of this writer, that the attorney general was engaging in an unwarranted move really outside his authority. And, most significantly, he questioned the practice of “contingent commissions,” bringing into question the legitimacy of this integral aspect of the business as it affects virtually the entire independent broker/agency system. Here again, he was stepping beyond the purview of the office of attorney general and, in doing so, creating anxiety and distress. The irony is, that when the complaint against Marsh is read with care, it becomes clear that the approximately $800 million of Marsh’s earnings attributed to “contingent commissions,” bears little, if any, relation to the monies earned by independent insurance brokers and agents for special services that result in a company’s annual profitable operations for individual accounts.
In fact, as the complaint clearly charges, the money paid to Marsh by insurers might be classed as tribute for favored treatment in getting business that might better have gone to another insurer. The process is somewhat, if not totally, bizarre and full of intrigue. What keeps it from being fiction, or the imagination of Spitzer to bolster possible political ambitions, is the documentation, including e-mails and other viable evidence. That leaves little to the imagination. If one wonders why Marsh did not challenge the attorney general on his allegations and his demand for fines and restitution, such a question dissolves as smoking guns are drawn out of the pockets of the numerous transactions. For example, the AG complaint against Marsh states: “In addition to carrots, Marsh also used sticks. The notes of one insurance company executive record that Marsh threatened to ‘kill’ the company if it did not ‘get the right number’ on the contingent commission agreement.”
Marsh & McLennan recognized its dilemma by mid-January this year and offered to pay $600 million to settle the “bid rigging” charges, but the attorney general asked for $750 million and a public statement acknowledging the improprieties. While the brokerage firm indicated reluctance to issue such a statement, fearing lawsuits by stockholders and others, it really was in no position to bargain. Aside from Spitzer’s documentation, its stock had already taken somewhat of a nosedive. Probably management also feared a loss of customers.
Aside from everything else, the disgraceful behavior uncovered by Spitzer galvanized individual insurance commissioners, the National Association of Insurance Commissioners, some other attorneys general, and even the New York Legislature, to get into the act. Additionally it aroused some members of Congress to re-examine the issue of federal regulation of insurance. There is word in Washington, according to at least one news story appearing in The New York Times, that the once strong attraction for substituting federal regulation for state regulation in several areas, is waning.
But this column is not aimed at the sordid operations of some brokers, but rather at the long and esteemed history of the independent insurance brokerage and agency system. The independent agent and broker, and even the agents for direct writing companies, have performed outstanding service to the public on all levels. One of the first questions asked after some accident, fire or disaster, is, “Is there insurance?” The vital need for insiirance protection is axiomatic, and the fact that the answer to the question, whether related to a single incident or a disaster, is almost always “yes,” is a tribute to the work of insurance brokers and agents located in virtually every hamlet in the country as well as in cities and suburban communities. As we know, these agents and brokers, unlike the major firms, work for commissions paid by their insurance companies, while the major firms are paid fees by their insureds.
Contingent commission agreements, as well as the other aspects of their relationship, are contractual between insurance agents and their companies. Similar understandings exist between brokers and companies. They spell out what the producers need to accomplish in order to earn this extra money. But the Spitzer challenge may put this business arrangement in jeopardy because the National Association of Insurance Commissioners (NAIC), late in December, adopted a model law that would, if enacted by the states, add complexities to the process of placing business.
The plus side of this NAIC reflective action is that its adoption was hardly unanimous and the likelihood of any fast acceptance (or enactment at all) by more than a few states, has little chance. Right behind NAIC is the National Conference of Insurance Legislators (NCOIL), looking to adopt its own version. So Spitzer, probably unintentionally, opened a can of worms, which, hopefully, will wriggle back into solitude.
At a hearing held by the Insurance Committee of the New York Assembly, broker and agent trade association representatives very forcefully and adroitly defended the contingent commission system. Traditional brokers and agents, the legislative committee members were told, operate in a highly competitive environment, and their customers are fully aware of how the marketplace works. They emphasized that the result is loyalty and continuity, as it has been for generations. Brokers and agents know this is true because the relationships with customers are usually enduring. Producer firms are well established and are recognized for their integrity even though they vary by the size of the community, concentration of commercial or personal lines, aggressiveness of the sales force, personalities of management and staff, and everything else that makes them vital to the insurance needs of their customers.
With these independent producers, contingent commissions are truly earned through their skills in personal guidance to their insureds and in providing their companies with accurate facts about the risk, which helps reduce the incidence of loss. A vast majority of independent producers keep current on changes in the business, laws and regulations, by attending courses and educational workshops provided by their associations. They work with the companies in coordinating automation and become active in associations and community activities. So that news stories are not blown out of proportion and the integrity of the business is safeguarded, independent producers need to be ready to inform those customers who ask challenging questions about the events and what the facts are.
Independent producers, aside from continuing their education through association courses, are usually avid readers of industry publications. Rough Notes is certainly a prime example with its presentation of articles on coverages, methodologies, automation, selling, service and other key issues.
The difference between the brokerage and the agency worlds is that of compensation. Payment of fees by customers, as contrasted with payment of commissions by insurance companies, presents a measurable difference when it comes to conflict of interest. The attorney general’s revelations make that clear. In his complaint paper against Marsh, Spitzer calls “illusory”‘ Marsh’s defense that the challenged contingent commissions are really market service agreements (MSAs) and therefore valid. He said the MSAs are really “concomitant of Marsh going to market on behalf of its clients, something that Marsh is duty bound to do as its clients’ agent and fiduciary-and for which Marsh is compensated by legitimate fees and commissions from the client.”
The independent insurance broker and agent earn the contingent commission, and that’s not an illusion.
Emanuel Levy, editor of Insurance Advocate from 1958 to 2004, joined the weekly insurance news magazine in 1946 after serving with the United States Army. He has appeared as a speaker at meetings and seminars across the country sponsored by producer and other industry associations, and is the recipient of many awards and citations. He served on the faculty of the College of Insurance for the annual orientation course for incoming insurance regulators and staff members, lecturing on the debate over state and federal regulation of the insurance business. He wrote insurance articles for the Economist Magazine and, for many years, was insurance section editor of the World Book Encyclopedia’s annual historical review book.
Copyright Rough Notes Co., Inc. Mar 2005
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