National Association of Mutual Insurance Companies

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P E R S P E C T I V E S

Don’t Let Broker Probe Hinder Needed Reform

New York Attorney General Eliot Spitzer’s criticism of the insurance industry took on a new dimension recently when he publicly declared his intention to run for governor of New York.

Many observers have suspected that Mr. Spitzer’s motivations, together with his choice of high-profile targets emblematic of Wall Street, are part of a calculated strategy to curry favor with the Main Street voters whose support he would need in a future run for office. After all, using a state’s chief law enforcement office as a springboard to the Governor’s mansion is a well-established route used by both Bill Clinton and John Ashcroft before being elected to the top office in their states. It’s common enough that those who work around state government joke that “AG” – shorthand for Attorney General – actually stands for “Aspiring Governor.” Mr. Spitzer’s current campaign against the insurance industry and his outrageous comments comparing the industry to organized crime are consistent with that strategy, in spite of the fact that America’s diverse network of insurers, agents, and brokers is more representative of Main Street than of Wall Street.

There is considerable irony in the Spitzer-induced agitation over broker compensation. According to Mr. Spitzer and his supporters, contingent commission arrangements prevent unwitting consumers from obtaining the best available policy at the best possible price. Their wholesale condemnation of contingent commissions has typically been accompanied by expressions of outrage over the “failure” of the insurance regulatory system to protect consumers from practices that may have caused some consumers to pay more for insurance coverage than they should have. In fact, many requirements of the insurance regulatory system have been having that effect for years, yet few of those up in arms over broker compensation seem to notice or care.

The most glaring examples are rate regulation and government-imposed underwriting restrictions, which force low-risk consumers to subsidize the cost of providing coverage for those with higher levels of risk. Given the current enthusiasm for disclosure and transparency, perhaps regulators should disclose the surcharge that these cross-subsidies impose on low-risk policyholders.

There is also a vast array of price-inflationary regulatory practices – ranging from gratuitous market conduct examinations, to burdensome rate and form filings, to the lack of uniformity among states with respect to routine administrative requirements. These rules and procedures generate enormous compliance costs for insurers that are ultimately borne by consumers in the form of higher premiums. And if the questionable practices of a few commercial brokers have driven up insurance costs for some consumers, consider the tort litigation system’s devastating effect on the price consumers pay for various forms of liability insurance.

In the broad scheme of things, the negative impact on consumers wrought by these regulatory and legal requirements far outweigh the few instances of bid-rigging and possible contingent fee abuse that have become the cause du jour among some editorialists and consumerists. That is why NAMIC has renewed its support for a modernized system of state insurance regulation that protects consumers, creates uniformity, ensures competitive markets and encourages choices for the insurance-buying public. We have urged reform-minded policymakers to remain steadfast in their support of a state-based modernization agenda. We know that won’t be easy, because already the Spitzer probe has caused some to question certain elements of the modernization agenda. For example:

Rate modernization. Unfettered price competition is the lynchpin of meaningful regulatory reform. Opponents of price competition have used the Spitzer allegations to suggest that if rating for commercial lines had not been deregulated, regulators would have been in a position to detect instances of bid-rigging. But the potential for bid-rigging exists across a wide range of industries. Only in insurance regulatory circles would anyone seriously suggest that the way to deter such criminal activity is through government-administered price controls.

State vs. federal insurance regulation. Proponents of an increased federal role in insurance regulation will no doubt cite the Spitzer allegations as proof of the inadequacy of state regulation. But let’s not forget that the most notorious corporate scandals in recent decades have involved industries that operate under federal regulatory jurisdiction. The savings and loan debacle of the 1980s and the more recent scandals involving the energy industry are hardly testaments to the effectiveness of federal regulation. Moreover, the targets of Mr. Spitzer’s own past prosecutions – investment banks, pharmaceutical manufacturers and mutual fund companies – are all subject to federal law and regulated by federal agencies.

Competition. With respect to both pricing and underwriting, NAMIC has long stood for the proposition that open competition spurs insurers to provide the most innovative products and services at the fairest price for consumers. Bid-rigging clearly involves illegal collusion among competitors and merits appropriate penalties and sanctions. Regarding contingent compensation arrangements, a rule requiring insurance brokers to clearly disclose to prospective customers whether they represent the customer, an insurer, or both, would allow customers to evaluate potential conflicts of interest when choosing a broker. The transparency created by such a rule would enhance competition and therefore benefit consumers.

But a proposed amendment to the NAIC Producer Licensing Model Act would require a level of disclosure that is unreasonable. Producers (which includes both brokers and agents) who receive compensation from both policyholders and insurers would have to disclose the amount of any compensation from an insurer, describe the method for calculating that compensation, and provide an estimate of the amount of compensation if it is not known at the time of disclosure.

Further, the amendment would require producers who receive compensation from an insurer to disclose whether the compensation will vary depending on the product and the insurer, and also whether it will vary based on factors such as the premium volume placed with the insurer or the insurer’s claims experience. Does the NAIC really believe that consumers need this level of mandatory disclosure to make informed choices?

The NAIC’s overzealous response to the Spitzer probe comes as powerful interests in Washington are lobbying in support of a dual system of state and federal regulation. To maintain the states’ exclusive prerogative to regulate insurance, the NAIC and state policymakers must rededicate themselves to the modernization agenda that NAMIC has supported for years. Most importantly, the state regulatory system must give up its infatuation with antiquated rate regulation. Using the Spitzer probe as an excuse to create additional layers of regulation ignores the real problems that must be addressed.

Charles M. Chamness
President, NAMIC

Posted: Friday, January 14, 2005 12:00:00 AM. Modified: Wednesday, September 07, 2005 3:24:29 PM.

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