Independent Insurance Agents Defend Themselves at Senate Hearing over Broker Compensation

November 16, 2004

The nation’s largest independent insurance agency group will go before a Senate subcommittee in Washington today to attempt to put some distance between large insurance brokers facing allegations of illegal activities and account steering and local independent agents who have different responsibilities and compensation plans.

Alex Soto, a Miami, Fla. independent agent and officer of the Independent Insurance Agents and Brokers of America (IIABA), will condemn bid-rigging and other illegal and anti-competitive conduct and urge that any “bad actors” be fully prosecuted. At the same time, the IIABA representative will lay out the differences between agents and brokers and between varying compensation plans.

Soto is scheduled to speak today on behalf of the IIABA before the Senate Governmental Affairs Subcommittee on Financial Management, the Budget, and International Security, which is opening hearings into insurance brokerage practices and the adequacy of the current insurance regulatory system.

“(T)here is a major difference between illegal activities, and long-established, legal, state-supervised business practices utilized in virtually every American industry, such as sales incentive programs,” Soto says in his submitted testimony.

“IIABA recognizes the concern expressed by some that the incentive compensation of brokers, although legal in all states, could lead to conflicts of interest or the appearance of such conflicts. IIABA believes the best way to guard against this concern is through the disclosure of all broker incentive compensation arrangements,” Soto adds.

He also defends a modernized system of state regulation of insurance as better than a federal system to prevent and remedy abuses.

Agents “are outraged by those who have engaged in illegal practices and tarnished the image of our great industry in the process,” he maintains, adding that agents have been among those whose reputations are suffering as a result of broad allegations.

Soto points out that most Americans deal with agents, not brokers. “The distinction between agents and brokers is important. Insurance agents typically do not get paid by the insurance purchaser, and it is commonly understood that the agent receives compensation from the insurer with which the business ultimately is placed. The compensation generally takes the form of a commission, which is disclosed by insurers to state insurance regulators as part of insurers’ rate filings.”

He notes that agents rarely receive compensation directly from consumers.

On the other hand, he explains, an insurance broker “offers advice directly to a client and solely represents that client …and is more likely to be compensated directly by the client in the form of a fee.” In some instances, the broker also receives commission from the carrier for placement of a policy, he points out.

Soto will also testify that, in addition, some agents and brokers may also qualify for incentive compensation from insurers when certain specified objectives are met. He defends these agreements as legal and long-standing part of America’s sales culture.

“Sales incentive programs are a legal and legitimate tool used in nearly every industry to reward performance, including those that also rely on commission payments. From refrigerators to cars, and homes to business equipment, compensation that rewards a sales force for excellence is sound business practice. There is nothing inherently wrong with such payments that reward performance excellence.’

He acknowledges a difference with incentives paid in some other industries.”Unlike some other industries, however, the existence and amount of incentive compensation paid to insurance producers is not based upon a particular insured or particular purchase of insurance but is paid based on the overall relationship between a producer and an insurer.”

Soto stresses that incentive plans differ.

“Placement service agreements (which were at the heart of some of the most egregious market manipulation allegations) and contingent commission agreements are entirely different compensation tools. Unfortunately, the two terms have been used in the media as if they are interchangeable.

“Put simply, PSAs compensate brokers up front for the placement of business, whereas contingent commissions are ‘contingent’ on a number of factors and paid on the back end. Contingent commissions can be affected by a range of factors outside the control of the agency or brokerage. Because contingent commissions are not calculated until after the close of the carrier’s year, an agent or broker does not even know if he or she will qualify for a contingent commission until after the year closes.”

He claims that “each party involved in the insurance transaction benefits from the use of contingent commissions” in that they encourage agents and brokers to engage in effective underwriting and risk management while also helping to appropriately match certain risks with particular insurance companies. “In the end, by bringing efficiency to the overall marketplace, all participants (the consumer, the insurance company, and the producer) benefit,” according to the IIABA representative.

He acknowledges concerns that incentive compensation can create a conflict of interest or the appearance of one because the broker is also paid a fee by the client and because of the broker’s unique relationship with the client. He said IIABA advocates transparency and “meaningful disclosure by brokers of all such agreements” but not their elimination.

He outlines some key elements that IIABA believes any broker disclosure requirement should have, including:

The disclosure requirement should be transaction-specific and apply to any producer acting in a particular transaction as an insurance broker and acting under the terms of a buyer service agreement.

The proposal should require brokers to disclose all incentive compensation arrangements (PSAs or contingent commissions) that are related to the transaction.

The disclosure should be made in writing prior to the actual purchase of the contract of insurance.

The disclosure requirement should be implemented by state officials, who have proven experience and expertise with insurance regulation, but it should be implemented without needless deviation or confusion from jurisdiction to jurisdiction.

Soto urges lawmakers not to overlook the value that competition in the marketplace brings to regulating the practices within the industry.

“In nearly every aspect of the insurance marketplace and certainly in main street America, the existence of effective competition serves as a check and a balance to deter the type of illegal conduct alleged against a New York broker. In fact, there are only a handful of large multi-national brokers with the economic position and leverage in the marketplace sufficient enough to even potentially convince insurers to submit fake or excessive bids, and strong enforcement can address those few instances if they arise.”

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