NCOIL Releases Broker Disclosure Model in Effort to Address to Compensation Issues

December 1, 2004

In an effort to address broker compensation issues that have arisen as a result of New York Attorney General Elliot Spitzer’s and other state investigations, the National Conference of Insurance Legislators (NCOIL) released its Proposed Insurance Broker Fiduciary Duty and Conflict of Interest Model Law. The NCOIL State-Federal Relations Committee, at its meeting in conjunction with the NCOIL 2004 annual conference, Nov. 18-21, considered the model and received input from interested parties, including representatives of agent and broker associations.

The model, introduced by Rep. Craig Eiland (TX), NCOIL president, and based on a proposed California regulation, was released in discussion draft form to allow state legislators and interested parties to work together to develop legislation for consideration in 2005 legislative sessions.

Eiland said, upon introducing the model: “This is a discussion draft—a starting point, not an end point. This is an emerging issue, grabbing attention just prior to many legislatures convening after the first of the year. No one really knows the breadth or depth of this issue yet. However, we can’t just sit still and wait, because many states are going to act one way or another on this.”

“With many legislatures convening in January, NCOIL recognizes the need for model legislation addressing this very important and controversial issue,” Eiland said. “The proposed NCOIL model would promote a uniform state legislative approach to brokers’ responsibilities to their policyholders and clients.”

According to NCOIL, “the proposed discussion draft model’s purpose is to require disclosure of compensation from any entity other than the insured in a broker vs. agent relationship, establish a fiduciary duty for insurance brokers to ensure that brokers protect the best interests of their clients, and create uniformity in allowing insurance commissioners to perform market conduct examinations on brokers.”

The NCOIL proposed model would apply to all licensed brokers or subagents, that conduct the business of insurance on behalf of, and purport to represent the best interest of, the client, as opposed to agents who represent the insurance company.

The National Association of Mutual Insurance Companies believes the definition of “broker” may be too broad.

“While we agree that the NCOIL draft attempts to narrow the restrictions to just insurance brokers, we are concerned that the definition of broker is too broad,” said Roger H. Schmelzer, NAMIC senior vice president-state and regulatory affairs. “Additionally, creating a fiduciary duty creates real marketplace issues that need to be vetted thoroughly.”

Eiland, who attended a Senate subcommittee hearing last month, stated there exists a wide-ranging confusion as to the definition of agents and brokers and their duties. “Ironically, Gramm-Leach-Bliley created some of this confusion—by blurring the line between agents and brokers and simply referring to them as ‘producers,'” he said.

The Property Casualty Insurers Association of America praised the legislators for their efforts to appropriately differentiate between the roles of agents and brokers in the draft. “Overall we commend NCOIL for its preliminary step in the right direction on the broker compensation issue,” said Robert Zeman, PCI senior vice president, industry and regulatory affairs during NCOIL’s recent national meeting in Florida.

Eiland said that the NCOIL model stresses strong enforcement of broker misconduct penalties, as compared to other proposed regulatory approaches. “We hope to make progress on this by the first of the year. As a result of our discussions and input at the initial hearing, we have already dropped the ‘suitability’ portion of the discussion draft because of its vagueness and difficulty to enforce.”

Eiland said NCOIL would continue to accept input from interested parties in order to further develop the model and that NCOIL legislators attending the NAIC meeting in December would speak to the issue.

“While NAMIC supports disclosure where appropriate it ought not create barriers to everyday transactions in main street America,” Schmelzer said. “Policymakers need to realize that legislation that is too broad and acted upon too quickly will have a negative impact on most insurance purchases.”

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