In a letter to the National Association of Insurance Commissioner President, Diane Koken, who also serves as the commissioner of the Pennsylvania Insurance Department, the Council of Insurance Agents & Brokers highlighted its suggestions for principles that the association believes should be the core of any future regulatory action.
Below is the letter submitted today.
Dear Commissioner Koken:
On behalf of The Council of Insurance Agents & Brokers, we write to commend you for your quick response to the issue of insurance broker compensation and disclosure of payment arrangements. We have discussed this issue with several regulators, as well as NAIC staff, and agree wholeheartedly with the approach the NAIC has taken.
Like you, we are deeply troubled by the serious allegations of bid rigging and fraud brought by New York Attorney General Eliot Spitzer. This activity is wrong and has no place in an industry that is based on trust. We also appreciate the concern expressed by many that contingent compensation arrangements, although they are legal and proper methods of compensation, could lead to conflicts of interest or the appearance of such conflicts in business arrangements.
In anticipation of the meeting this week of the NAIC’s Executive Task Force on Broker Activities, we would like to share with you the principles that we believe should be the basis of any regulatory approach to this important issue:
1. Transparency and Disclosure: We believe the best way to guard against conflicts of interest or the appearance of such conflicts is through transparency in payment arrangements between carriers and brokers, and between brokers and their clients, and through proper and appropriate disclosure of contingent compensation arrangements. Prior disclosure of contingent compensation arrangements should be required in any transaction where a producer offers advice directly to a client and solely represents that client in the purchase of a commercial lines policy.
We encourage the state regulators to act affirmatively to encourage such transparency and disclosure, and look forward to working with you as you develop model requirements.
2. Coordination of State Inquiries: In light of the recent investigations in New York and elsewhere, several states have sent inquiries to insurers and brokers to elicit information about compensation arrangements. We support this process and believe that more information and better understanding of compensation arrangements will benefit not only the industry, but consumers as well. Having said that, we believe it is essential that these inquiries be as uniform and coordinated as possible in order to lighten the burden to both industry and regulators. We fully support the Task Force’s stated goal of developing and coordinating implementation of a uniform inquiry template. We urge the states to develop and use a single inquiry form, and to limit their inquiries to their domestic companies and resident producers. The regulators would then be free to share information with each other as necessary without additional inquiries.
3. Recognition of Legitimate Compensation Practices: For many years, contingency commissions have been a legal and proper method of compensation for extra services provided by the broker to the insurance carrier on behalf of the commercial client. With proper disclosure of compensation practices, and absent illegal and unethical practices such as bid rigging, we believe this legitimate method of compensation should not be further restricted.
4. Uniformity: Finally, we believe it is essential that the state regulators address this issue in as uniform a way as possible, and we appreciate all the steps you have taken to date to act in a uniform fashion. Creation of the Task Force was the first critical step. The involvement of many of the states with the largest insurance markets is also a hopeful sign that all states will ultimately follow the process developed through the NAIC. Commercial insurance is a national and global business. Given the headlines of recent weeks, it would be profoundly harmful for 30 or 40 different sets of potentially conflicting regulations to emerge. This is especially true given the fact that a mechanism for a credible national response has already been put into place by the NAIC.
These principles track closely the approach the NAIC has outlined. We believe if done correctly, this process will lead to strong, sensible disclosures of broker contingent compensation arrangements, and give commercial lines customers the information they need to fully understand the role of their producers.
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