Outsiders See Need for Practical Solution to Compensation Disclosure

III Joint Forum: From the Outside Looking In

It’s not very often that the insurance industry invites outsiders to share their opinions, so last month’s Insurance Information Institute’s Joint Industry Forum was noteworthy for including a segment with panelists who might be considered outsiders, albeit marginally.

These observers warned about extreme reactions by regulators to the current brokerage scandal, by insurers to rating analysts, and by homeowners to new pricing models. The panelists included a departing state regulator (New York Superintendent of Insurance Gregory Serio), an industry investment analyst (V.J. Dowling, managing partner, Dowling & Partners Securities, LLC), an insurance company rating expert (Matthew Moser, group vice president, A.M. Best Company) and two publishers (Brian Sullivan, Risk Information Inc., and David Schiff, The Schiff Insurance Observer).

No industry panel can escape comment on the ongoing contingent commission debate and brokerage practices investigations begun by New York Attorney General Eliot Spitzer last fall.

Schiff, referring to language on the Independent Insurance Agents and Brokers of America’s Web site, questioned whether, in light of the fact many receive contingent fees, the claim by independent agents that they serve their customers first might be misleading.

“It’s a joke,” chimed in Sullivan, who later defended independent agents.

Securities analyst Dowling maintained that the key to whether contingent fees should continue lies in the distinction between agents, who represent insurers, and brokers, who represent insureds. “For a broker, there is no rationale for contingent fees but for agents, there are very different circumstances,” he offered.

Most tended to agree that disclosure is important, with Serio adding that despite industry complaints “it wouldn’t be Armageddon” if full disclosure is mandated.

Dowling suggested full disclosure could be accomplished in a one-page form. However Serio cautioned that a simple single-page solution is unlikely after lawyers and lawmakers get involved. There is an “acute danger of overreacting” to the Eliot Spitzer probe, the exiting regulator warned, citing the example of the “27-page fiasco” now required in life insurance disclosure. “We need a practical solution,” he argued.

Several panelists criticized state regulation but nobody on this panel went so far as to tout federal regulation as a panacea.

Serio argued that in light of the Spitzer revelations, states should be given expanded authority to conduct periodic market review of large insurance brokers.

Moser played it safe, insisting there are positives to both state and federal regulation. “It’s more a matter of consistency,” he said.

Sullivan was the most critical of the prospect of federal regulation of insurance, dismissing the proposed optional federal charter supported by some insurers as a “silly” idea. But he cautioned that the real problems with federal regulation would occur in personal lines. “Federal regulation could never work in personal lines. For instance, you’d never get the same systems adopted in Iowa as in Massachusetts. Personal lines is way too state-specific.”

Sullivan also predicted that as personal lines insurers continue to employ credit scoring and other more sophisticated formulas to match price to risk, regulators would have a tough time keeping up.

Serio seemed to agree that there could be repercussions. “It’s the balkanization of insurance rates. After a while, you start to run away from the notion of insurance.”

Part of the problem, Serio suggested, is that while commercial lines clients may have options such as risk retention groups or captives, personal lines customers have no other place to go.

Panelists agreed that to survive into the future, small insurance companies must be very focused and well run. Schiff noted that many recent company failures have been large insurers, not smaller ones.

“Smaller companies with some expertise do very well,” noted Moser. “Some focus on geography, some on markets.”

For Sullivan, the hardest place for an insurance company to be is in the middle. “There’s not enough focus or scale,” he maintained.

Topics Carriers Agencies Legislation Talent