Broker Disclosure Dominates Western States Surplus Lines Conference

Brokers should disclose contingent commissions and other incentive agreements to consumers, industry experts said at the Western States Surplus Lines Conference held July 24-26 in San Diego. Participants in the “Ethics and Professionalism/ Current National News” panel disagreed, however, on the specifics of disclosure.

Overall, panelists said that disclosure would only benefit the industry. “Among my peer group and within our own firm we discussed the issue of proper disclosure for all areas of revenue,” said Bruce Basso, chairman of Alburger, Basso De Grosz. “It is good for the industry. It makes us more professional. It makes our production and marketing staffs better at what they do. Contingencies and incentive agreements as we know them today properly managed internally and properly disclosed to clients do not distort the activities of the professional insurance broker.”

Basso explained that production staffs usually have no knowledge of corporate contingencies and how they are structured. Because of this, there has really been no inherent conflict when dealing with clients. Nevertheless, there should have been disclosure over the years, he said. “The problem that we’ve had up till now is that there had been no disclosure. Had disclosure been in place all these years, would you see all of these knee-jerk reactions?”

Despite the “knee-jerk reactions,” one panelist said that the industry has not gone so far as to eliminate the commissions in question.

“Contingent commissions, even with all the hoopla that’s been talked about, even with the Spitzer investigation–I don’t know of any jurisdiction or anybody who’s eliminated contingent commissions as a matter of law,” said Richard Bouhan, executive director of the National Association of Professional Surplus Lines Offices. “They have been part of the settlements of the larger brokerage firms, but basically there is nowhere that contingent commissions have been eliminated or banned.”

Bernd Heinze, executive director of the American Association of Managing General Agents, said that the Eliot Spitzer investigation into contingent commissions is a means of gaining exposure.

“What’s unfortunate is that we have an attorney general who’s now running for election in New York state government,” Heinze said.

“He has employed a number of law students and recent [law graduates] to pore over billions of e-mails trying to find things that they can attach wrongdoing to,” he continued. “I don’t know of any of these students that have CPCU licenses, who understand the licensing and disclosure requirements of being a professional of insurance. Now many of the things that Spitzer found were appropriate to be found and appropriate to be corrected. There may be some bid rigging and there may have been some crimes that have been committed based upon conflicts of interest and illegal kickbacks.

“But let the companies have the opportunity of defending themselves in due process,” he added. “Do not try to understand the marketplace. They are looking for a way to get exposure for a candidate who’s running for office.”

Heinze said that broker disclosure should not be the subject of federal and state regulations. “That will detrimentally impact the free market economy that we have and the ability to allow capitalism to reach an entrepreneurial state,” he said. “The best kind of innovation comes from competition. This ought to be something that we attack. This ought to be something that we are the agents of change for, and not the regulator who’s been elected.”

Heinze emphasized the need for communication between all of the parties involved in the issue. “The whole issue is not one where we ought to, as an industry, take up sides against the regulators or the legislators, either on the state or federal level. There needs to be a new type of communication, more direct and more frequent communication and education between the regulators and the legislators and us.”

Regulators reportedly did not receive any complaints from the public dealing with broker disclosure prior to Spitzer’s investigation, according to Sherwood Girion, deputy commissioner for consumer services and market conduct at the California Department of Insurance. “Since I’m deputy commissioner over consumer service and marketing conduct where all the complaints come in, I should have a big long list,” he said. “I have my paper with me and it has about zero complaints on it.”

Whether or not a problem existed before the Spitzer investigation, panelists agreed that disclosure is now necessary.

Bouhan said that disclosure should happen at the retail level. “The transaction takes place at the retail level, so the disclosures that need to be made need to be made at that level,” he said. “Ultimately the transaction of insurance is to serve the consumer, the buyer of the insurance. [I think we should have] disclosures that allow the consumer to make a proper decision on the type of coverage, price and security, three issues that the consumer really needs to [base] his decision on.”

Basso went further, stating that disclosure should happen at the wholesale broker level as well. “The reality of it is, anybody in the chain that produces a product to the ultimate buyer, has a right to have disclosure,” he said. “While it is impossible to explain the relationship and the structure of a wholesaler all the way to the ultimate buyer, the retail broker has the right to understand and know how the wholesaler broker is compensated because it ultimately affects the price of the product.”

Heinze argued that there should be an exemption for managing general agents and brokers. “There is no direct relationship or contact between the wholesale agent or broker and the policyholder,” he said. “It would perhaps bend the rules of decency if one would have to disclose what one is doing with the part market under all circumstances which may be different from another. That type of disclosure would lead to more work and more difficulties of trying to get policies in place and the risk eventually bound. There’s nothing wrong with the retailer having discussions, but the wholesaler has no [contract] with the policyholder. Its contract is with the marketplace and that’s the way it should stay.”

The disagreements over the specifics of broker disclosure did not alter the panelists’ view of the issue. “There may be some subtle disagreements going on, but in the end everybody basically agrees that some form of disclosure at different levels must occur,” Girion said.

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