REGULATION
Battle of insurance brokers over payments comes to Buffalo
The North American chief executive of the world’s third-largest insurance brokerages called on New York State Monday to ban controversial payments to all brokers, while local independent agents defended such pay and rejected the need for more disclosure.
The state Attorney General and insurance regulators are gathering testimony to decide whether to require insurance agents and brokers to disclose compensation ranging from free trips and fruit baskets to thousands of dollars in commissions — or eliminate them.
Questions about potential conflicts of interest from “contingent” or “supplemental” commissions, and full disclosure of compensation were the main focus at the Monday hearing that drew about 50 people to the central branch of the Buffalo and Erie County Public Library.
In 2004, then-Attorney General Eliot Spitzer first investigated certain brokers for allegedly “steering” clients toward carriers that paid them the highest contingent commissions.
Spitzer’s probe concluded with a handful of top firms, including Marsh & McClellan Companies and American International Group, being forced to eliminate contingent commissions and pay hundreds of millions of dollars in fines and restitution. Two CEOs were fired, and several executives were arrested for alleged bid-rigging.
Now, under a new governor and amid complaints about an unlevel playing field, Attorney General Andrew Cuomo and the New York State Insurance Department are re-examining the issue.
Don Bailey, North American CEO of Willis Group Holdings, the world’s third-largest insurance brokerage, called for the state to abolish contingent commissions and make the pay transparent.
“It’s an old, old business with a lot of standard practices and they’re not all good,” he said.
Bailey said the perceived conflict of interest is just as serious as any actual conflicts. The London-based company dropped such commissions four years ago, and paid $50 million to policyholders in an April 2005 settlement with Spitzer.
He said because his company gave up contingent commissions, they “operate at a clear competitive disadvantage” since rivals making the commissions don’t have to charge customers to make up the lost commission income.
Bailey recommended phasing contingent commissions out by 2010 and making compensation disclosure mandatory.
But David Gelia, executive vice president of United Insurance Agency in Amherst, refuted the idea that contingent commissions create any conflict of interest, and argued that the marketplace takes care of the industry. Gelia is also secretary-treasure of the Independent Insurance Agents and Brokers of New York.
Gelia said that disclosure should be voluntary and only given upon a client’s request. “I think that is just another set of information that clients could be confused by,” he said.
Gelia added there is no conflict of interest because he does not know how close he is to a carrier’s benchmark for commissions until year end, when he either gets paid or doesn’t.
F. James Ginnane of Planned Futures Financial Group in Williamsville, said that disclosing additional numbers like contingent commissions to the client may “divert attention” from the price of the insurance policy.
He compared the contingent commission to the fee tacked on to airfare when a travel agent helps advise a client and find the plane ticket.
Ginnane said he receives commissions mostly through reward trips and office allowances. Rattling off some trips that Massachusetts Mutual Life Insurance Co. and others have paid for, he cited a week-long Baltic cruise, a trip to Montreal for four or five days, a trip to Toronto for three or four days and dinner trips to the Finger Lakes.
“They need to reward producers for producing,” he said, urging the panel to direct their focus toward insurers instead.
Additional hearings will take place in Albany on July 23 and Manhattan on July 25. Depending on the findings, formal or informal focus groups may be created to continue investigations.
