Chubb Latest to Face N.Y. Probe of Compensation Pacts

May 18, 2004

The Chubb Corporation in Warren, N.J. has received a subpoena seeking information regarding certain compensation agreements between insurance brokers and Chubb’s insurance companies from the New York Attorney General Eliot Spitzer.

Chubb said it will fully cooperate with the inquiry.

Marsh& McLennan, Willis Group and Aon Corporation previously confirmed that they have received subpoenas from Spitzer. The subpoenas are seeking information as part of a preliminary inquiry into compensation agreements between insurance brokers and insurance companies.

In February, the national, non-profit public policy group, Washington Legal Foundation (WLF), wrote the New York and California attorneys general and insurance departments asking them to probe “two potentially damaging practices engaged in by some in the insurance brokerage industry.”

The two practices WLF wants targeted are placement service agreements (PSAs) and “leveraging” in the insurance brokerage industry. WLF alleges that these practices present conflicts of interest. The group maintains that PSAs encourage brokers to steer customers to insurers that will profit the broker in contingency fees, but not necessarily benefit the customer.

“This is a troubling trend in the insurance brokerage industry,” said WLF Chairman and General Counsel Daniel J. Popeo. “Insurance brokers are paid to advocate for their customers, not themselves.”

WLF likened these agreements to abuses recently uncovered in the mutual fund industry by the Securities and Exchange Commission.

The practice of “leveraging” or “tying” refers to brokers coercing insurance companies into using their services to purchase their reinsurance in exchange for future referrals for their primary insurance business.

A J.P. Morgan report in January warned that PSAs “can create the appearance of factors other than the best interests of the insured being contemplated.” It also said these agreements are likely to be scrutinized in 2004.

Insurance officials have noted that such compensation agreements between insurance companies and brokers are a longstanding and common practice within the insurance industry and are disclosed.

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