The Pfundstein Report
Several days after last month’s column on insurance producer compensation was published, the National Association of Insurance Commissioners (NAIC) issued its first draft of a model broker compensation disclosure law.
I was pleased to see that the NAIC rejected the approach initially proposed by the California department. In California’s proposal, the important legal distinction between agents and brokers was blurred. As I said in November, this struck me as questionable in light of the fact that an agent represents the insurance company and a broker acts on behalf of the prospective insured.
NAIC’s proposal is designed to amend the Uniform Insurance Producer Licensing Act, a version of which New Hampshire has adopted. The proposal requires adequate and timely disclosure of compensation arrangements between insurance producers and insurers. It would make sense for the Legislature to take a careful look at NAIC’s draft which, in my view, is the type of measured regulatory response necessary to the contingency income issue.
Although not perfect in anyone’s view, the NAIC’s draft law acknowledges the distinction between an insurance agent and insurance broker. I would recommend further strengthening this distinction to make it clear that the first part of the proposal applies only to brokers actually receiving compensation from both the prospective insured and the insurance company. The current language is confusing and can be read to apply to both agents and brokers. I do not believe this is the intent.
The second part of the proposal would require all producers, including agents, to provide adequate disclosure. It does so in a way less likely to cause administrative and customer relationship burdens than the broker-focused first part. This is entirely appropriate because the broker actually works for the prospective insured, not the insurance company.
Adequate and timely disclosure of compensation arrangements between insurance producers and the insurance companies underwriting the products sold by them remains the best solution to this issue.
However, it is unlikely that the only industry changes from New York Attorney General Elliot Spitzer’s lawsuit will be the enactment of agent/broker disclosure requirements. There are at least four other real impacts that are already being debated.
It was just reported that 86 percent of those attending the 16th annual Executive Conference for the Property Casualty Industry expect contingent commissions to be phased out. Nearly 46 percent predicted producer compensation in 2005 will be based on straight commission with reimbursement mechanisms for expenses.
Another likely result of the bid-rigging fiasco is a renewed focus on the federal regulation of insurance. Everyone in the industry supports regulatory modernization. However, whether this modernization will be primarily federal- or state-led is a matter much debated. Nevertheless, it is safe to assume Congress will take a real hard look next session.
Unfortunately, what seems to be an industry-wide black eye due to the illegal conduct of a few players also may make re-enactment of the Terrorism Risk Insurance Act (TRIA) exceptionally difficult, if not impossible. As my October column outlined, there are enormous economic consequences should TRIA not be reenacted. Without this risk-sharing program, insurers will move to exclude coverage. In those metropolitan areas hosting attractive terrorist targets, availability and affordability of commercial insurance will be very significant issues.
At least one recent report has additionally speculated that the broker bid-rigging scandal will perpetuate the soft market. Brokers will work even harder to get lower pricing for their clients, reducing the amount of premium in the system available to pay legitimate claims. This further strains the capital available in the commercial insurance system.
One positive development of the agent/broker compensation debate is more adequate and timely disclosure of producer compensation arrangements. Unfortunately, adverse long-term consequences also are likely as the result of the illegal activity of a few.
Donald J. Pfundstein is managing director of the Concord law firm of Gallagher, Callahan & Gartrell. He can be reached at email@example.com.