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Insurance Under Investigation
By Rachel Sobel
If you’ve picked up a newspaper or watched the evening news this winter,
you have heard plenty about New York Attorney General Eliot Spitzer’s
investigation into improper business dealings in the insurance industry. We
asked Dr. Robert Hartwig, CPCU, senior vice president and chief economist for
the Insurance Information Institute (III) to help us explain the issues at hand
and what impact these investigations will have on the environmental insurance
market.
According to the Insurance Information Institute’s background
paper, on October 14, 2004, Eliot Spitzer filed a civil suit bringing charges
of fraud and antitrust violations against a large insurance broker. The suit
alleges that the company illegally steered clients to insurers that paid it
the highest commissions and solicited rigged bids for insurance contracts.
Several major insurance companies were named as participants, prompting executives
of three companies to plead guilty to criminal charges in connection with the
allegations. Numerous insurance brokers, executives and board members have resigned
or been fired. New subpoenas continue to be issued in this matter.
Since then, the investigation has broadened to other states and other areas
of the insurance industry, from health insurance to finite risk products. Spitzer
is also investigating possible incidences of “tying,” whereby certain
brokers are alleged to have steered business to insurance companies in return
for arranging the insurer’s reinsurance.
On December 7, 2004, Spitzer announced his plans to run for New York Governor
in 2006. Hartwig declined to comment on any relationship between Spitzer’s
political aspirations and the investigation.
The Real Issues
The core of the investigations appears to focus on contingent commissions —
payments made to brokers based on business volume or profitability. These commissions,
also known as placement service or market service agreements, have been long-established
and legal industry practices worldwide. However, it is not the existence of
these agreements that is the real issue.
“The only new revelation in the Spitzer suit is that a small number of
people were involved in anti-competitive acts,” says Hartwig. Sptizer
alleges that some individuals may have crossed over from generally accepted
business practices to illegal anti-competitive acts such as bid rigging.
While these breaches of conduct are not necessarily connected to contingent
commissions, the investigation has prompted some companies to stop offering
them and some brokers to stop accepting them. Other companies have reacted by
increasing disclosure of contingency agreements to insurance buyers.
Despite these initial reactions, Hartwig believes that contingent commissions
will not go away. “They are here to stay. With proper disclosure, they
are an appropriate way to incentivize brokers to sell insurance.”
He explains, “The existence of commissions does not, and never did, relieve
the broker of his contractual responsibility to the buyer. The broker is hired
to secure a range of quotes with options in price, terms and quality. Contingent
commissions should not be an obstacle to appropriate business practices.”
So what effect will Spitzer’s investigation have on the environmental
insurance business? Not much, according to Hartwig. “It will be business
as usual.”
The only change that Hartwig anticipates is in the way some brokers are compensated,
and this will be transparent to buyers, because brokers will likely be required
by new regulations to disclose details of their compensation arrangements. Buyers
may also find it necessary to pay for some broker services on a fee-for-service
basis.
Rachel Sobel is Managing Editor of Brownfield News.