The Council of Insurance Agents & Brokers said today it is “misguided” to presume that brokers and insurance carriers must be in an adversarial relationship to best serve their commercial customers.
In testimony prepared for delivery before a Senate subcommittee, Albert R. Counselman, president and CEO of Riggs, Counselman, Michaels & Downes in Baltimore, MD, said the commercial clients benefit from a strong relationship between broker and carrier that helps identify most appropriate coverage for the risk being insured. He said a policy with the best price is not always the best protection.
Counselman, a former chairman of The Council, was one of several industry witnesses scheduled to appear Tuesday before the Senate Government Affairs Committee’s Subcommittee on Financial Management, the Budget and International Security. The hearing, which is chaired by outgoing Sen. Peter Fitzgerald, R-IL, also will feature state attorneys general and regulators who are looking into broker compensation issues.
“Over the course of the last several weeks, some have suggested that the broker’s job is to canvass every available product from each and every carrier to identify the ‘best’ carrier for that particular client and to then zealously represent the client in an adversarial negotiation process against that carrier,” Counselman’s testimony said.
“The claim is that only through this adversarial process will the client receive the broadest coverage at the cheapest possible price from the ‘best’ carrier. In the real world, however, it is neither practical nor desirable to evaluate each and every carrier for each and every client.”
Counselman noted that placing commercial coverage for large risks is a complicated undertaking that frequently involves layers of coverage from a number of different carriers to assemble a complete coverage package. For example, he said, his company specializes in health care coverage, and it is not unusual to need 142 separate layers of coverage to fully insure the risk exposure of a typical hospital.
The least expensive coverage is not necessarily the best coverage, Counselman said, because in the end, insurance is fundamentally a promise between client and carrier to cover a risk exposure. A broker needs to be certain that the carrier has the capacity and financial solvency required to pay the claim in the event of a loss, as well as a “reputation that suggests a willingness to make good on that promise.”
“That is why the characterization of the client-carrier relationship as adversarial is misguided,” Counselman said. “At the end of the day, the carrier partners with the client — through the broker-intermediary — not as opponents but in a cooperative way to insure the risks that client presents.”
In his testimony, Counselman stressed that The Council “is deeply troubled by the serious charges of bid rigging and fraud” brought by New York Attorney General Eliot Spitzer against Marsh & McLennan Companies, the world’s largest brokerage firm.
“No one is more concerned about this activity than our brokerage community as we pride ourselves on earning the trust of our customers every day,” Counselman said. “If these allegations are true, the wrongdoers should be prosecuted to the fullest extent of the law. These individuals have not only severely damaged their own brokerage firm but they also have cast an undeserved pall over an entire industry and besmirched the reputations of honest brokers throughout the country and undermined the trust on which our industry is built.”
But Counselman stressed that contingency commissions, which Spitzer and others have suggested were at fault for the fraud and bid-rigging, are perfectly legal and proper and have been a feature of the broker compensation landscape for decades. It was the criminal intent of the wrongdoers, not contingency commissions, that should be blamed for the malfeasance.
“While isolated bad actors created a corrupt scheme to limit real choices for some customers, the role of contingent commissions in this evil equation has been irresponsibly hyped and misrepresented,” he said. “Contingent commission payments were not central to the alleged fraud, despite the connections that some have claimed.”
“While such baseless and over-heated charges create good headlines and produce new class actions for trial lawyers, they do not represent grounds for a stampede to judgment on a wrong- headed solution that will cost more to consumers than it saves,” Counselman said. “Solutions should be based on facts and deliberation, not headlines and court settlements.”
Counselman noted that it is not the practice of collecting contingency commissions but the failure to fully disclose them that is at fault. The Council has been on record since 1998 with a toughly worded statement calling for full disclosure of contingency commissions and continues to believe that transparency is the best way to avoid conflict of interest or the appearance of conflict.
He stressed The Council will actively participate in legislative and regulatory reviews of the compensation process to clear away the clouds of suspicion that hang over the brokerage industry.
“We embrace this process of review and pledge to do everything in our power to make sure that these bad actors are prosecuted to the fullest extent of the law and that this pattern of behavior is never repeated,” Counselman said.
A full copy of The Council’s testimony is available here (PDF).
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