Conn. AG Joins Probes of Brokers’ Fee Disclosure

May 10, 2004

The attorneys general of New York and Connecticut have launched parallel investigations into certain fees being paid by insurance companies to insurance brokers with large corporate and government clients.

At issue is whether there is anything improper being done when the brokers steer those clients to insurers, while receiving fees from those same insurance companies.

New York Attorney General Elliot Spitzer issued subpoenas last month to three insurance brokers.

Connecticut Attorney General Richard Blumenthal said last week that a focus of his probe is whether buyers of the insurance are aware that their broker is also being paid by the insurance company.

“One of the issues in our investigation is the adequacy and accuracy of disclosure,” he said.

Paul Larrabee, a spokesman for Spitzer, said the New York attorney general is “in the early stages of an investigation of issues related to conflict of interest in the insurance industry.”

“It’s been a common theme of his inquiry relative to conflicts of interest in the corporate environment,” he said.

Tom Baker, a professor of insurance law at the University of Connecticut, said the investigations are focusing on property casualty insurance, health insurance and other segments of the industry.

Questions should be raised if “the person who represents me is getting payments from the other party,” he said.

Even if no wrongdoing is found, the result of the investigations could lead to more transparency in the insurance business, he said.

“If it’s all above board and everyone understands (the fees), there’s not a problem,” Baker said.

The insurance brokers subpoenaed by Spitzer, Aon Corp., Willis Group Holdings Ltd., and Marsh & McLennan Cos., say they are cooperating fully.

Insurance companies defended the fee payments, saying they are for legitimate services and are fully disclosed.

Dave Potter, a spokesman for The Hartford, said the fee payments are “consistent with a long-standing industry practice.”

In addition to commissions, The Hartford generally offers incentive payments to industry agents and brokers based on the amount of business they bring in and how long the business remains on an insurer’s books, he said.

The compensation agreements are consistent for group life, disability, accidental death and dismemberment and similar policies. Disclosure of the fees varies by agent, Potter said.

“The Hartford has no objection to disclosure compensation arrangements by brokers to customers,” he said.

Robert Hartwig, chief executive of the Insurance Information Institute in New York, said the investigations are “not the next chapter in the corporate governance saga that has rocked the nation in the last five, six years.”

“The fees we’re discussing here are disclosed and have been disclosed by the brokers who were subpoenaed,” he said. “Buyers of insurance are aware. Risk managers are well aware of it. The risk managers are instrumental in pushing for more disclosure that’s now an industrywide practice.”

Hartwig said the fees are for services such as research.

The amount of the fees depends on the service provided and whether it is based on volume or performance, he said. Fees could vary as a percentage of profit or revenue.

“I would not say it is any standard amount,” Hartwig said.

Kate Kiernan-Pagani, a spokeswoman for the state Insurance Department, said agency officials are not aware of any problems with the fees.

“We’ve not heard of the issue, but we’re going to look into it,” she said. “I don’t know enough to comment.”

A spokesman for Aetna also declined to comment.

Joan Palm, a spokeswoman for St. Paul Travelers Cos. Inc. referred questions to industry trade groups.

Copyright 2004 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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