The multiple investigations triggered by New York Attorney General Eliot Spitzer have tarnished the insurance industry’s public image more than they have changed its private behavior, according to experts at a recent Manhattan seminar.
Marsh, Aon and the other large brokerage houses caught up in the investigations have had to pay restitution and agree to halt certain practices. But for the rest of the industry, it appears to be business as usual.
The seminar, “The New Ethics of Insurance,” was hosted by the eastern chapter of the Professional Liability Underwriting Society. The panelists sought to measure the insurance scandals not only in dollars (see “The Price of Scandal” on page 66) but also in how they have changed the industry.
“There is a heightened level of sensitivity. Most of the scrutiny has been directed at brokers, but even companies have to weigh how they conduct their business,” claimed Stephen Sills, CEO of Darwin Professional Underwrit-ers, Farmington, Conn.
Perhaps the most sensitivity surrounds the media’s role in the investigations.
Much of the industry’s bad image can be blamed on the media’s preoccupation with scandal and the willingness of public officials to exploit the media, suggested moderator Stephen Marcellino, partner with Elser Moskowitz Eddelman & Dicker LLP.
“The media causes a lot of problems,” asserted Audrey Samers, deputy superintendent and general counsel for the New York State Insurance Department.
According to defense attorney Marvin Pickholz, the media is under competitive pressure to attract viewers and readers. Prosecutors use the media to help create an environment against a defendant. In the process, however, they can ruin lives. “The pressure used to be on the government agencies to be careful before bringing charges but now there are competing regulators,” he said.
Not everyone sees the media as the culprit. “They’ve been pretty fair. It’s a complex subject,” Sills said. “There are people who have done things they shouldn’t have done. I think the disinfectant of sunlight from front pages is a good thing and it certainly wakes up some people a lot better than a memo from a CEO.”
For others, complaining that the press is unfair is a waste of time. “The media is not about fairness; it’s about what can you put in a 10-second sound bite. That’s the price you pay in our society, and you have to figure out how to deal with it,” said Ann Marie Marson of James River Insurance Co.
As senior vice president of claims at James River, Marson has to deal with the industry’s negative image daily. She and others are worried about how the industry’s low standing in the court of public opinion affects how the industry fares in courts of judges and juries.
“It makes it harder for claims to do its job,” she said. It’s more difficult because jurists and judges see and hear the news regarding Spitzer. This causes carriers to think twice about taking certain cases to trial, where a negative industry image could make a difference. “Perception is reality and this comes to fruition in the jury box,” she said.
While claims departments might feel the pressure, it’s not clear that others in the industry are. Spitzer targeted broker compensation including contingent commissions, yet compensation practices have not changed much. Most insurance companies still pay contingent commissions and, except for the three biggest brokers that settled with Spitzer, most brokers and agents still accept them.
The insurance department’s Samers, who has been active in the investigations, acknowledged that there still is no law or regulation against contingent commissions in New York. Neither Spitzer nor the insurance department has pressed for a statutory prohibition; instead they have called for improved disclosure of compensation by agents and brokers. The department is drawing up disclosure rules.
Personally, Samers said she would like to see the percentage an agent or broker receives for commissions stamped on every declarations page. That’s her opinion and not a department position; the department’s position won’t be known until its regulations are finished.
As Samers and others stressed, contingencies per se are not the problem; instead the problem is the questionable activities they spawn, such as bid rigging and account steering.
When an audience member asked why brokers should reveal income when other salespeople don’t, Samers said, “I have heard that so many times. It is such a disservice to the industry.” Insurance brokers build relationships and have the policyholders’ best interests at heart, she said. “You guys sell trust and integrity.”
Pickholz explained that regulators are concerned with not whether but why a broker received a contingent commission. “Did it make him select a company he wouldn’t otherwise have chosen for a client?” is the question.
The industry must develop standards governing what to tell customers in language that is understandable to those with different levels of expertise and intelligence, he said.
While compensation disclosure is primarily the responsibility of agents and brokers, insurers must also pay attention. Assuming that the disclosure policy of the broker is a good one and that it is being followed is not the wisest path, Pickholz warned. An insurer should be able to demonstrate it had reason to believe that the broker was adequately disclosing. “They must have some procedure. Companies can’t just cover their eyes and assume.”
At a minimum, insurers might ask their brokers for copies of their policies on disclosure, although this could open them to exposure over the adequacy of the disclosure program. An insurer would likely be protected if the policy looks acceptable on the surface and there is evidence that the broker is enforcing it. “But if it becomes obvious to the company that it’s not effective, then speak up,” Pickholz said.
Samers agreed that in everyday dealings, insurance companies might not have a way to police brokers’ disclosure practices. However, regulators “prefer a company that has some rules in place over one that has none or just looks the other way,” she added.
There is one behavior that might be changing as a result of the investigations. According to Sills, there has been a loss of some of the informal price indications brokers would obtain from insurers as a measure of their interest on an account. “They are very much a time saver. It helps to know if an account is within the insurer’s appetite to even quote on a risk,” Sills offered. But now, some of that communication is strained. “Now they can’t say what they are paying or what they are looking for.”
Samers, questioned the value of the casual quote, especially when contracts and policies go unwritten. “A little more formality would be helpful in this industry,” she said.
Samers indicated that as with contingent commissions, price indications are not the problem; it is the conduct that comes after getting quotes that can be troublesome. The price indications must be legitimate and not part of a bid rigging or account steering scheme.
“A company can still get an indication of price. It’s what you do with that information,” she added, stressing again the importance of disclosure to clients.
Sills took issue with the seminar’s title, “The New Ethics of Insurance.”
“There is nothing new here,” he pointed out. “Ethics that have always applied, still do today. There are new rules. Some of the things people were caught doing were not acceptable under the old ethics either.”
Was this article valuable?
Here are more articles you may enjoy.