The New York Insurance Association (NYIA) cautioned state lawmakers in Albany against “a knee-jerk public policy reaction” to allegations of improper business practices by brokers, agents and insurers that could inadvertently disrupt the insurance marketplace.
In a December 2 letter to Assemblyman Alexander Grannis, chair of the Assembly Insurance Committee, NYIA president Bernard Bourdeau expressed concern that the legislature may act inadvisably before “all the facts are in.”
He also vigorously protested the vivid language in a committee hearing notice that insurance markets have been shaken by “widespread fraud and corrupt practices.”
“The use of these terms is hyperbole,” said Bourdeau in his letter to the chair of the insurance committee which is conducting a public hearing on December 6. “The assertions are simply not supported by the facts uncovered to date.” Moreover, he said, While the industry itself undertakes a rigorous self-examination, the markets continue to function in an orderly fashion.
“My major concern,” said Bourdeau, “is that a knee-jerk public policy reaction to these allegations could actually cause a major market disruption affecting insureds; a disruption that has not occurred to date.”
In the letter, Bourdeau pointed out that the vast majority of property/casualty insurers operate with great integrity and demonstrate exemplary business practices.
“These facts are supported by the Insurance Department’s Consumer Services Bureau reports, complaints and statistics,” he said. “This industry is one of the most highly-regulated to further ensure an honest and trustworthy system.”
Concerning the most serious charges emerging from the investigation by New York Attorney General Eliot Spitzer, Bourdeau stressed that bid rigging and price collusion are illegal.
“Those engaging in that activity should be prosecuted because they have violated a fundamental principle of free markets and in doing so have impugned the reputation of the vast majority of insurance industry competitors who operate within the law and in an ethical manner,” he said.
Bourdeau said it was important to note key distinctions between agent markets and broker markets.
He explained that the vast majority of property/casualty insurance transactions in both personal and commercial lines that are subject to the payment of contingent commissions are effected under a system in which the insured pays a premium for insurance and nothing else.
“Under that system the payment of contingent commissions is a sound business practice, perfectly ethical and perfectly legal,” said Bourdeau. “I urge you not to tinker with that system. It isn’t broken.”
He noted that the market for large commercial risks, a much smaller piece of the overall market, operates differently as coverages, exclusions, policy limits are often customized to serve the needs of the insured which often employs a risk manager who works with a broker.
In many of these cases, a broker contracts with the insured to represent the insured’s interest in the formulation of contract terms and premiums.
He further noted that because of the large size of the risks involved only larger well-capitalized insurers are able to compete for the risks and that because of the specialization involved in tailoring coverages, only a relatively few brokerages are able to represent insureds.
Bourdeau also pointed out that while most insurers have not eliminated contingent broker fees and insurers and producers are now reexamining their business practices, the markets from an insured’s perspective have not been affected.
“If after all the facts are in, you determine that legislative action is necessary, NYIA will be happy to work with you in drafting statutory changes,” he said.
The New York Insurance Association is a trade association of property/casualty insurance companies which provide coverage for autos, homes and businesses throughout New York State.
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