IBA West President Discusses Broker Disclosure, Work Comp Issues

Mark Wells, publisher of Insurance Journal, recently spoke to Stan Simpson, the newly elected president of the Insurance Agents and Brokers of the West and a principal at Buckman-Mitchell Inc., an independent agency in Visalia, Calif. Simpson identified IBA West’s actions relating to the agent/broker compensation disclosure issue and talked about California’s workers’ comp market.

Wells: Let’s start by talking about the agenda for IBA West this year.

Simpson: IBA West represents about 1,100 agencies and brokerages in California, Oregon, Washington and Alaska. Our two prime reasons for existing are advocacy for the insurance agents and brokers, the independents and their staffs and effectively their clients, and also education. A trade association exists much like a union, to represent its constituents or the people that belong and bring them together and represent them in various aspects of their business life. Our most broad thrust as an association, in this state anyway (95 percent of the members of IBA West are in California) is in the area of advocacy, which involves all the types of legislation that have come down or might come down and dealing with the California Department of Insurance and the different areas that they choose to deal with us. Over the years we have retained a firm in Sacramento, lobbyists Norwood & Mattoch.

Wells: We want to talk about the issues facing independent agents and brokers in California. Number one has to be workers’ compensation. Can you tell us how the association has been involved in discussions with the Legislature and reform bills?

Simpson: The fact of the matter is this. The passage of SB 899 and the workers’ comp reforms, there’s one side of the equation that says, “Thank the Lord that’s happened and it’s going to work,” but there’s another side, the medical care providers, the applicant attorneys who are saying, “This isn’t going to work.” They claim it isn’t being taken care of. The problem exists here. Even with loss ratios improving, even with an insurance commissioner and department that are advocating that there will be a certain percentage cut and all that, that’s all well and good, but workers’ comp insurance isn’t something that happens overnight. The real savings has to take place over a period of time.

There’s no question, in the last 12 months, average rates have gone down 5-20 percent depending on the size of the account. I think that the effort by everybody, and I think it has to be everybody–medical care providers, applicant attorneys, chiropractors, insurance agents and brokers, insurance companies, employers and employees–all have to work together and I think maybe the message is being received out there slowly but surely. Otherwise I don’t know any other solution to the problem. Everybody has to give a little bit.

Wells: It looks like we’re starting to see a little light at the end of the tunnel though. We talked to a recent insured whose annual premium is $7 million a year and he said that this is the first year since he doesn’t remember when that he’s got five quotes on the table for his workers’ comp account. He’s delighted. We’re beginning to see some new players coming into the California marketplace.

Simpson: That’s true. I think the aspect you mentioned is very important, about carriers and insurance companies coming back into the state and they’re beginning to write workers’ comp. There are some; they are limited. I think one needs to be careful about what they offer. Premium is one thing but service capabilities are another. Another element that’s just happened in the last year is alternative markets, such as captives. I’m leery about things like that because on the surface and/or initially they may sound good but I don’t know how they’re going to reduce losses over what a competent insurance company can do. So it’s going to be a long game to see how well that works out.

Wells: Certainly the biggest news story in the industry today is New York Attorney General Eliot Spitzer’s indictment of Marsh McLennan, which has cast a pall over all independent agents and brokers. Trans-parency is now becoming the watchword of the day. Can you talk a little bit about how this has affected your members and what the Association is advocating that your members do?

Simpson: What you bring up is, at least in the modern history of American insurance, one of the most tragic situations that we could envision. First, let me say that if there is illegality going on and certain cases of insurance bid rigging or putting coverage with a carrier to enhance the income of the insurance agent or broker vis-à-vis the consumer being taken care of first, that is not good and those people should be properly punished. Second, whether it’s Mr. Spitzer or Mr. Garamendi or Mr. Kreidler in Washington or any other members of the National Association of Insurance Commissioners, I think they need to step back and understand how the free enterprise system works. First, they don’t work in the free enterprise system. They are government regulators. Certainly they have to protect consumers. But I think the broad blanket that’s being woven over all the insurance agents and brokers, independent or otherwise, or insurance companies in this country, is an unfair indictment.

Now how does that affect us? We don’t have a choice. A regulator or a governmental entity has a tremendous amount of power over whatever decision or body they decide to go after. Therefore, we can’t just ignore the situation and we can’t just hope that it’ll go away. We have to be reactive to the situation. The answer probably lies in the best way that we become reactive. Now cooperation is certainly number one on the chart. I repeat, I or I believe any of my constituents, in no way will put up with people who are in it for themselves or perform illegal acts to the detriment of the customer. Whatever Mr. Spitzer has done, he has insulted the integrity of the average insurance agent or broker. It depends on how we react.

How we react at IBA West: we’re a trade association. We represent some 1,100 insurance agencies and brokerages which probably have about 100,000 licensees combined in those offices so we’re charged with the responsibility of providing those people with a conduit of information and representation to the regulatory authorities on how we conduct our business and that we aren’t part of this and that we are honorable and we have integrity. That’s a huge responsibility. How we choose to do that is by employing legal counsel. We are responding to legal questions.

[Earlier this year], in the state of California, 205 letters went out from the California Department of Insurance from their general counsel Gary Cohen, a five-page epistle based on the National Association of Insurance Agent model request letter. These various agencies, selected at random I’m told, had to respond by March 4. If you have had the opportunity to read the request, there’s just no way one can respond to the answers by then.

We’re now in a negotiation stage for more time or a modification of the questions asked. The letter has come out without any allegations against those that have received the letter, just information. The act of privacy probably is very important here, particularly with the customer lists that the CDI has asked to be returned to them. We’re right now in the negotiation stage of how we’re going to handle this and the best way that we can represent our members.

Wells: What can the industry do to increase public trust and awareness of the situations?
Simpson: What bothers me most over the past few years and maybe it is a reflection of American business in general, is the lack of integrity and honesty attached to business and private enterprise. Probably some of the fault lies with us, on how we publicized and represented ourselves, or with cases like Enron, how the publicity has been terrible for American business.

If we go back to Proposition 103 in 1988, there’s 58 counties in the state of California. Only three voted in favor of Prop 103: Contra Costa, San Francisco and Los Angeles. For those that won, it’s a little hard to defeat that because about 70 percent of your population resides in those three areas, so the rest of California, or 55 counties that voted against Prop 103, lost the vote. How do you change that? I think the industry back then had poor representation, poor public relations, did not put the right people forth to tell the story. The California Association of Insurance Companies spent $35 or $40 million to defeat it. A good friend of mine said at a meeting at the time that if the insurance business would have come out in favor of Prop. 103 and spent $35 million to pass it, the people of California probably would’ve voted against it simply because the insurance people would have been for it.

I think that’s a sad situation when an industry gets labeled as such. I think that insurance agents and brokers need to step forward properly. They need to increase their level of awareness. They need to become more involved in their advocacy and their Legislatures. They need to talk to their legislators, their congressmen, their local representatives. They need to let the story be known that we are a very honorable and integral part of American commerce.

Wells: Let’s talk a little bit more about broker compensation. Can you tell us more about what specifically is going on in California and how it relates to agents and brokers?
Simpson: The question about disclosure and transparency, the openness of letting the customer know what our gross compensation is, is a fair question. But it’s also, despite being a fair question, a huge change that’s lurking for the average independent insurance agent and broker.

Based on what’s gone on in New York and spread throughout the other states, particularly California because of our size and the number of agents and brokers, the question is coming up: should agents and brokers have to disclose the amount of their compensation along with the premium?

For years there has been a law that brokers in the state of California have to disclose what their compensation is in all forms (whether it’s strictly money or profit sharing or other situations of compensation) and that’s been the rule. I think most have been honestly doing that.

Now in the distinction between the broker who represents the customer and places insurance with the carrier versus the agent who has a contractual obligation with insurance carrier representing their insurance to the customer is where the rub is coming in. How far will it go on disclosure? I don’t think there’s any question that something is going to be done all over the United States on all people that provide or sell insurance. There’s going to be some type of disclosure.

How’s it going to be done? On a survey we sent out some months ago, even before the Spitzer situation, the overwhelming majority of the respondents were not in favor of disclosure. And that’s a mindset that they still have. They probably are right from their own personal situation and we need to rely upon them as members advising us representing the association.

On the other hand we can’t ignore the fact that this problem is getting larger and larger and there’s got to be a solution to it.

We’re in the process of starting an educational situation as we speak to all members of the association about what’s going on. There have been recommendations from a few, such as just having the insurance company show on the declaration page of the insurance policy either what the commission percentage is or the dollar amount and the same with endorsements there too to return of additional premiums.

There was a suggestion that we work with the California Dept. of Insurance and therefore with the California Legislature on how to incorporate into the Insurance Code the verbiage of disclosure and all that. People will point to the real estate industry or other industries where they have disclosure on real estate transactions. Certainly it is negotiable.

The other issue and probably one of the big points: a lot of the agents don’t want disclosure because they don’t want someone to know what they’re making and they’re afraid to tell them what they’re making. Maybe an even bigger issue is that a lot would feel comfortable going to a fee based system instead of disclosure.

So where we’re at right now is just tremendous dialogue and discussion going on between insurance agents and insurance brokers, insurance companies and our legal people on what would be the best situation.

When will there be an answer? I’m not sure it will come in 2005 because whatever the answer is from a legislative standpoint has to go through Sacramento. And I just don’t know if both sides will allow either to back off a little bit this year. Certainly I would say within the next two legislative sessions in Sacramento we’re going to have an answer.

Topics California Carriers Agencies Legislation Workers' Compensation