Despite charging that too many state insurance regulators have become “industry captives,” Connecticut Attorney General Richard Blumenthal is rejecting calls for federal intervention in the regulation of insurance and instead urging more aggressive state action against improper activities by insurance brokers and companies.
Drawing upon his own agency’s expanding investigations and what he termed the “historic leadership” of New York Attorney General Eliot Spitzer in the investigation of industry practices, Blumenthal has developed his own prescription for reform of state insurance laws and regulations to better police the industry.
Blumenthal was among those scheduled to speak 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.
In his testimony submitted to the Senate panel today, Blumenthal warns that the “scale and magnitude of corrupt practices” continue to mount and that “much more remains to be done.”
He said his investigators have uncovered evidence of illegal and improper anti-consumer conduct, “ranging from bid-rigging to fraudulent, concealed commissions and secret payoffs to flagrant conflicts of interest — all stifling competition and inflating insurance costs to consumers.”
He promises that state prosecutors will pursue the cases aggressively even as insurers and brokers adopt changes voluntarily, and they will block federal efforts to intervene. “This state enforcement and reform effort cannot be derailed or delayed by federal intervention and intrusion. We have a right and responsibility to enforce state antitrust laws. We will seek strong sanctions and scrutiny. I say with great respect to the United States Congress, and particularly to the distinguished members of this panel: we fervently hope for cooperation and will fiercely fight preemption.”
He urges all states to be just as aggressive, warning that state “laxity and inaction” will invite federal intervention. “State insurance commissioners must heed the call for reform and act quickly to restore consumer confidence. Too many have been industry captives. Some insurance commissioners have aggressively responded to the crisis, but many have not. State insurance regulators may redeem credibility and restore public trust only if they join the fight for reform.”
“Federalizing this problem is unnecessary and unwise,” according to Blumenthal.
“Rather than rely on federal regulation, state insurance laws should be reinvigorated and reinvented– made robust and real agents of reform.”
He will testify that states should establish “an unequivocal, explicit fiduciary duty between the insurance broker and the consumer, require clear and conspicuous disclosure of fees and duties owed to consumers, enable consumers to pay for broker advice that is truly independent of insurance company compensation, and mandate transparent bid systems according consumers informed choices free from insurance company influence.”
While commending California Insurance Commissioner John Garamendi for his proposed regulation establishing an explicit insurance broker duty to disclose all information concerning insurance company payments and to prohibit brokers from favoring their interests over consumers, Blumenthal believes it does not go far enough. He is recommending that Connecticut insurance laws be strengthened to:
Establish a code of professional responsibility for insurance agents and brokers, including a broker fiduciary duty to consumers, with clear disclosure of that duty prior to any transaction;
Require insurance agents to clearly and conspicuously acknowledge that an agent is acting on behalf of the insurer, not the consumer, and that the agent is paid by the insurer based on sales of the insurer’s product to the consumer;
Require insurance brokers paid solely by insurers to reveal details regarding such compensation;
Provide consumers with the choice of paying a broker directly for the broker’s services — and, if the consumer makes such choice, prohibit the broker from receiving any compensation from the insurer in connection with that business;
Mandate that both brokers and agents disclose all insurance quotes to the consumer and record in writing the reasons why a particular insurer is being recommended and the nature of any insurer compensation, e.g. straight line fee or a fee contingent on amount of business booked.
Blumenthal’s office has been heavily involved in the industry probes. He has sent 135 letters of inquiry to industry companies and brokers, in cooperation with Insurance Commissioner Susan Cogswell.
Since mid-October 2004, the attorney general has issued a series of antitrust subpoenas to 29 insurers and 14 insurance brokers seeking information concerning contingent commission agreements, placement service agreements, bonus or incentive agreements and arrangements and related business practices between insurers and insurance brokers. He said more subpoenas would follow in light of evidence indicating illegal and unethical practices concerning a broad range of insurance products.
According to Blumenthal, the initial information reviewed by his staff reveals business practices at the national large broker level that are “riddled with ethical conflicts and the potential for serious abuse” and that suspect arrangements go beyond those thus far publicized.
“Incentive payments, contingent commissions, placement service agreements, overrides, and outright payoffs appear to be common industry practice, enabling and even encouraging improper and illegal activity,” he maintains.
He cited the example of one insurer that paid a broker a six-figure bonus even though the broker failed to meet the sales goal. Blumenthal says this “six-figure payment seems simply to be a bribe intended to steer future business to that insurer.”
Blumenthal has also written to chief elected officials of all 169 cities and towns in Connecticut asking for information concerning their use of insurance brokers to purchase municipal health, worker’s compensation and local property casualty insurance
He said he is also examining state contracts with insurance brokers and insurers to determine whether illegal conduct has directly harmed state taxpayers.
He thinks Congress should examine whether any federal agency has used brokers or agents to purchase insurance and whether any illegal steering or bid rigging occurred in these federal transactions.
He maintains that he will be bringing lawsuits and that while they will be important, so is reform of state regulation.
“Noteworthy for this subcommittee –as well as our state legislature — is that we are enforcing and relying on antitrust and consumer protection statutes because the state insurance laws do not adequately prohibit such obvious conflict of interest situations,” says Blumenthal.
He points out that until 2001, Connecticut issued separate licenses for insurance brokers and agents. This distinction reflected the theory that brokers worked for the consumer — whether a small or large business, an individual or a government agency — while the insurance agent represented insurance companies.
But in response to Congressional pressure to streamline state licensing procedures, the National Association of Insurance Commissioners (NAIC) created a model insurance producers act adopted by virtually all states, including Connecticut, that eliminated the distinction between agents and brokers and making them both “producers.”
Blumenthal believes this was a mistake that needs to be corrected. He says it was done “to facilitate the interstate growth of insurance brokerage and agent business, often to the detriment of consumers.”
He maintains that the NAIC model act contemplates brokers receiving fees and commissions from insurers in exchange for consumer business, but it fails to recognize the potential for conflict of interest and to require disclosure of such fees, much less afford other protections for consumers.
He is seeking to encourage whistleblowers from within the industry. “Despite receiving many boxes of documents, some of our most useful information comes from people in the industry. We welcome such information and are determined to protect confidential sources,” he said.
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