Agent’ Or Broker’ Consumer Choice Dictates Disclosure

What Eliot Spitzer has done within the insurance industry should be entered on the positive side of the ledger. While much of the follow-up has driven up expenses and slowed down the inner workings of insurance carriers, the rooting out of illegal business practices, incompetent leadership and strong-armed hubris on the brokerage side of the house has done immeasurable good.

In an attempt to remedy a situation, which by all analysis of existing factual information is confined to a very small area within a very large industry, the National Association of Insurance Commissioners has created model legislation with very broad implications for practitioners and very narrow impact for customers. Typical of hastily drawn measures, it addresses the symptoms rather than the problem.

With pressure building for evidence that state regulation works within the insurance industry, the NAIC has been working diligently to prove that it can approach the monumental task of regulating a very complex industry in a logical, efficient and unified manner. So far they have not been successful.

There is no central authority to foster cohesiveness and there is a wide disparity in competence, resources and philosophy within the group. Many states are so inadequately staffed that they are six or more months behind in form, rate and rules filings.

By and large, state regulators are parochial entities. They tend to focus on the wrong issues while solvency, bad actors and fraud continue to haunt the industry. They spend resources on detailed and drawn-out analyses of new product filings instead of an analysis of existing business where the real problems lie. It is quite evident that the prior analysis of new products and pricing has failed as a model for securing solvency. Instead, it has proven effective at creating inefficiency, interminable time lines for new products and an industry that innovates at a snail’s pace.

As the NAIC continues to fine-tune its symptom solution, regulators might instead consider a solution that obviates the need for elaborate and complicated disclosure and transparency rules. If they want to effect meaningful change, states need to take a new approach.

Let’s start with the basics. From a legal perspective, there is a distinct difference between the terms “agent” and “broker.” From a business standpoint, that distinction has been allowed to blur. As with most problems, a return to the basics can provide effective guidance.

Insurance regulators should establish clear definitions of brokers and agents and structure licensing around those definitions. Licensing should be required at two levels, one at the entity level and one at the individual level. Every qualified retail insurance entity would be allowed to license themselves as an agent, as a broker or both.

Any qualified individual within those organizations could choose to be licensed as an agent, a broker or both but would have to follow the fortunes of the entity. Thus, if an entity were licensed only as a broker, then the individuals within that entity could not be licensed as agents.

Carriers would be required to appoint their producers as agents, brokers or both. Carriers would issue policies through agents and brokers according to their appointment, clearly indicating on the policy in large red letters whether it is a “broker” policy or an “agent” policy. The broker policy would be issued net of any commission for the broker.

The broker would have to arrange payment from the customer for his services via lawyers and accountants. The agent policy would carry whatever commission the agent and carrier have negotiated. Market forces would take care of the rest.

The essence of Spitzer’s original complaint was that certain individuals and entities were holding themselves out as brokers yet acting as agents. While individuals and entities would be allowed to license themselves as both, they could only intermediate a single client/carrier relationship as one or the other, and be paid by either the carrier or the customer, not both.

The idea that an agent of a carrier should be required to disclose his compensation arrangement with that carrier would become an unnecessary administrative cog. Competition for the vast majority of agent-driven business is intense and the options are many. Any customer issued an “agent” policy would likely have several outlets from which to choose. If not, that customer could request a “broker” policy. Disclosure accomplished.

Our industry is once again trying to salvage old inefficiencies by creating new, even more inefficient solutions. We must continue to strive to find different ways to be more efficient and effective while building checks and balances that are driven by appropriate market forces.

Carter is president and CEO of Target Capital Partners, Avon, Conn. He can be reached at wcarter@target-capital.com.

Topics Carriers Agencies