New York Producer Compensation Hearings Conclude; Record Open for Comment Until August 15

The New York Insurance Department in conjunction with the New York Office of the Attorney General recently concluded a series of joint public hearings on compensation arrangements for insurance agents and brokers on July 25, 2008.

The hearings, which took place throughout New York State, were held on July 14 in Buffalo, July 23 in Albany and July 25 in Manhattan, and covered issues including contingent and supplemental commissions, producer compensation disclosure, deceptive or anti-competitive practices, were designed to obtain views from interested parties on the proposed addition of a new regulation governing compensation and disclosure.

New York First Deputy Superintendent of Insurance Kermitt Brooks and Deputy Attorney General for Economic Justice Michael Berlin presided over all three hearings.

Now that the hearings have concluded, the record will remain open for public comment until August 15, 2008. Written comments may be submitted to Broker Compensation Hearings, Public Affairs Bureau, New York State Insurance Department, 25 Beaver Street, New York, NY 10004, or e-mailed to PublicHearingsComments@ins.state.ny.us with the subject line “BROKER COMPENSATION HEARINGS.”

Issue History

In 2004, the then-New York Attorney General and Superintendent conducted investigations of a number of insurance brokers and insurers to determine whether certain types of producer compensation led to deceptive business practices by brokers and insurers. The investigations also focused on whether there was adequate disclosure of compensation to clients. The Attorney General and the Superintendent alleged that, at many companies, payment of a type of commission called contingent compensation led insurance producers to steer their clients to insurers paying the producers the most compensation. The Attorney General and the Superintendent also alleged that the then current level of disclosure did not properly inform clients of the compensation to be received.

As a result, the Attorney General and the Superintendent entered into a number of agreements and stipulations that prohibited the receipt of contingent commissions by certain insurance brokers; prohibited the payment of contingent compensation by certain insurers for certain lines of insurance; provided a mechanism for expansion of the prohibition of contingent compensation to additional lines of insurance; and required substantial improvements in the disclosure of producer compensation provided to certain producers’ clients. The agreements, however, did not include all the producers and insurers doing business in New York.

The Superintendent, who is empowered under New York insurance law to regulate producer compensation, sought public testimony about whether agents, brokers and all other insurance producers should be required to make full disclosure to the insured and obtain consent in writing for any compensation from an insurer or other entity relating to the issuance, renewal or servicing of the insured’s insurance policy or annuity contract.  Both the Superintendent and the Attorney General also invited public input on contingent commissions, and whether such compensation creates an irreconcilable conflict of interest for producers.

While contingent commissions are not payable on a per risk basis, but are allocated based on the performance of the entire portfolio of business placed with a particular insurer, the contingent commission schedule is known to producers at the beginning of a given period of time (usually one year).  However, contingent commissions actually earned are calculated some period after business is placed and loss experience is calculated.

Some insurers also pay supplemental commissions, which are similar to contingent commissions in that an incentive structure based on profit, volume, retention, and/or business growth is generally put in place at the beginning of a given year.  Under a supplemental system, rather than paying additional cash commissions at the end of the year, the incentive structure is used to reset the flat percentage commission for the following year.

According to critics, contingent commissions create a conflict of interest, ostensibly for independent producers. Depending on the volume and profitability of business referred to insurers, the size and structure of contingent commissions offered to intermediaries can vary significantly and lead to abuses such as improper “steering” of clients to insurers that may fail to provide coverage as beneficial as that offered by competitors.

Advocates for contingent commissions argue that competition in the marketplace can adequately address any conflicts. They also point out that the conflicts of interest created by contingent commissions are also inherent in the payment of supplemental and flat percentage commissions.

 

July 14 Hearing

Joining the Superintendent and the Deputy Attorney General on the July 14 presiding panel were:

• Robert Easton, New York Department of Insurance Deputy Superintendent and General Counsel
• Steven Nachman, Deputy Superintendent for Fraud and Consumer Services
• Melvin Goldberg, Assistant Attorney General

The following interested parties offered testimony at the July 14 hearing, including (to view the complete written statements or testimony of hearing invitee, click on the listed name):

• Don Bailey, CEO North America, Willis Group Holdings
• David Gelia, Executive Vice President, United Insurance Agency, Inc.
• F. James Ginnane, Planned Futures Financial Group
• Henry Kaye, Past President of the Professional Insurance Agents of NY
• A producer, an agent and consumers

Mr. Bailey spoke against contingent commissions, saying they create an unbalanced insurance market and should be completely abolished.  He added that brokers who accept contingent commissions are essentially receiving a subsidy from insurers on prices offered to clients.  He believes that all insurance broker compensation should be transparent and that a level playing field should be created whereby all brokers abide by the same rules.  Mr. Bailey’s remarks drew criticism from officials of trade associations representing smaller agencies and brokerages.

In a written statement, Mr. Gelia said that competition and commitment to find the best combination of terms, conditions and price for each customer makes it illogical to assume that incentive compensation leads to a conflict of interest for producers, and that disclosure should be voluntary and not mandated by regulation.

To view an archived webcast of this hearing, click here.

To read news coverage of this hearing from National Underwriter, click here.

July 23 Hearing

Joining the Superintendent and the Deputy Attorney General on the July 23 hearing presiding panel were:

• Robert Easton, Deputy Superintendent and General Counsel
• Matthew J. Gaul, Special Counsel
• Steven Nachman, Deputy Superintendent for Fraud and Consumer Services
• Melvin Goldberg, Assistant Attorney General

The following attendees provided testimony (to view the complete written statements or testimony of hearing invitee, click on the listed name):

• Paul Magaril, Regional Manager and Counsel, Property Casualty Insurers Association of America
• Neal Sullivan, Chairman of the Board, Independent Insurance Agents and Brokers of New York
• John Bailey, Past President of Professional Insurance Agents of New York
• Ellen Melchionni, President, New York Insurance Association, Inc.
• Paul Macielak, President and CEO, New York Health Plan Association
• George A. “Shad” Steadman, President and COO, Rutherfoord, Inc., on behalf of the Council of Insurance Agents and Brokers
• J. Sadler Jayes, NYS President, and Robert Miller, Trustee, National Association of Insurance and Financial Advisors
• Robert G. Gruber, Independent Broker
• Kurt Bingeman, Owner and President, Russell Bond & Co., Inc. on behalf of the American Association of Managing General Agents
• Richard Zick, President and CEO, Utica First Insurance Company

Following are summaries of each attendee’s testimony:

Property Casualty Insurers Association of America (“PCI”)

PCI suggested consideration of what is most important to the consumer:  ensuring open and competitive markets.  To effect this, the consumer should understand the relationship of the parties involved, be aware of all market options and have access to accurate, unbiased and timely information.

PCI believes that transparency and disclosure are important components of open, fair, competitive and reasonably regulated markets.  Supporting the actions of private parties in a free marketplace, the organization opposes “overreaching or burdensome proposals that fail to deliver any real value to consumers” and “blanket prohibitions on incentive compensation programs.” 

Neal Sullivan, Chairman of the Board, Independent Insurance Agents and Brokers of New York (“IIABNY”)

Mr. Sullivan stated that the practice of “steering” of business by unethical brokers to insurance companies with the most lucrative compensation benefits is not typical and has been effectively eliminated through prosecution of the brokers/companies that were the subject of the original New York-based 2004 investigation. 

He indicated that IIABNY strongly supports incentive-based agent compensation and does not think it creates a conflict of interest and is, in fact, good for the market.  

He explained that incentive-based agent/broker compensation plans benefit the industry by:

• Fostering profitability for both the insurance company and independent agents/brokers by encouraging business and customer relationship growth and long-term customer retention 
• Encouraging agents/brokers to educate, support and train customers and employees on risk control and management practices
• Encouraging good working relationships between agents/brokers and underwriters, leading to better client service
• Adding a strong incentive for accident prevention, and reduction of claim frequency and severity
• Motivating agents/brokers to fully qualify clients

Mr. Sullivan offered support for voluntary agent/broker compensation disclosure if asked by policyholders, and strong opposition for mandatory disclosure, inasmuch as the latter would increase operational costs that would then be passed on to consumers and unfairly single out independent agents/brokers.  

John Bailey, Past President of Professional Insurance Agents of NY (“PIANY”)

Mr. Bailey stated PIANY’s support for the existing New York insurance system, which he said allows fair compensation for insurance sellers and fair treatment of insurance buyers.  Contingent and supplemental commission arrangements are legal and time-tested forms of compensation. 

This system offers many benefits including:

• Increased market competition that protects consumers
• Encouragement of agent/broker professionalism
• Help for consumers to manage risks effectively
• Help for agencies to remain competitive

Mr. Bailey continued that PIANY feels mandatory compensation disclosure is unnecessary and would result in discrimination against independent agents/brokers.  Mandatory disclosure also would be confusing to consumers and could lead to illegal commission rebating practices.

Ellen Melchionni, President, New York Insurance Association, Inc. (“NYIA”)

Ms. Melchionni testified that current New York laws are effective, and that the benefits consumers enjoy as a result of New York’s competitive marketplace are proven and numerous.  The NYIA believes that producer compensation is necessary to support this system. 

She continued by saying that contingent commissions and other forms of producer compensation should not be classified as improper practices.  Current law offers sufficient mechanisms for regulators to punish insurers for non-compliance and sufficiently discourages “steering.” 

Contingent commissions help small companies stay competitive.  If contingent commissions were banned, consumer choice would be reduced because the number of insurers in New York’s marketplace would decline.  Contingent commissions also help align the interests of insurance producers and carriers, which helps consumers by making insurance premium rates more accurately reflect differing exposures to varying risks.

The NYIA feels transparency is a good policy, but that net policy cost is most important to consumers, not agent/broker compensation.  Compensation disclosure should remain voluntary and be dictated by the marketplace.

Paul Macielak, President and CEO, New York Health Plan Association (“HPA”)

Mr. Macielak spoke on behalf of the HPA, which believes that insurance producers deserve fair compensation and that rules governing the health insurance industry should be dictated by the principles of:

• Leveling the playing field among Health Maintenance Organizations (“HMOs”) and insurers
• Promoting transparency in the purchase of insurance coverage
• Producer/purchaser interaction should always provide value to the purchaser

In the current system, the playing field among HMOs and insurers is not level.  For example, commissions paid by HMOs to insurance producers are capped at four percent, whereas commissions paid on insurance products are not.   The same rules should apply for all types of products.  This level playing field would improve consumers’ comparison ability and eliminate potential conflicts of interest.

The HPA is in favor of compensation disclosure, which it believes will increase transparency.  Commission and bonus disclosure would better enable consumers to understand any possible broker incentives and should generally be disclosed in advance of a sale.  Mr. Macielak cautioned, however, that transparency rules reflect the differences among community-rated and experience-rated markets and remain operationally flexible so as to not add unnecessary consumer cost . 

He concluded that any further regulation adopted should have sufficient flexibility with respect to non-commission related compensation in order to maintain the costs savings system that currently exists.

George A. “Shad” Steadman, President and COO, Rutherfoord, Inc., on behalf of the Council of Insurance Agents and Brokers (“CIAB”)

Mr. Steadman stated the CIAB’s hope that these hearings will advance a common regulatory framework under which all U.S. agents and brokers may operate.  Optimally, the CIAB envisions agent/broker compensation formulae and amounts as dictated by the free market, and believes that transparency is the solution to potential conflicts.  Therefore, the CIAB does not see the need for further regulation in this area. 

Emphasizing that contingency compensation arrangements are a legal and legitimate method of helping to facilitate a cooperative risk management/insurance environment from which all parties benefit, Mr. Steadman said that banning this compensation form would neither eliminate all potential conflicts of interest, nor empower consumers.

The CIAB supports a strong “disclosure regime.”  Currently, the CIAB recommends that all insurance intermediaries provide clients with a notice detailing the types of compensation received.  On a national level, the CIAB supports usage of the National Association of Insurance Commissioners (“NAIC”) model disclosure language to promote uniformity. 

J. Sadler Jayes, NYS President, National Association of Insurance and Financial Advisors (“NAIFA”) and Robert Miller, NAIFA Trustee

NAIFA supports contingency commissions and other forms of producer compensation and believes that any disclosure mandates should be restricted to instances where insurance producers receive compensation from consumers and carriers. 

The NAIFA is opposed to mandatory commission disclosure at the point of sale, and instead strongly supports total policy cost disclosure, which it believes is necessary for consumers to understand fully what is received for their premium payments.  The clearest method for understanding total policy cost is to examine the difference between the amount of premium paid and the policy’s surrender value.  This information clearly can be seen in the illustration of the policy.

Making agent commission disclosure at the point of sale a mandatory practice could:

• Lead to misunderstanding of the total policy cost
• Encourage buyers to look for the lowest commission rate instead of the policy that best fits their needs
• Draw attention away from the policy’s ability to meet consumer’s needs
• Put pressure on agents to illegally rebate a portion of their commission to make a sale
• Discriminate against companies that use agents to sell policies, rather than advertising, telemarketers and salaried employees

The NAIFA also supports the use of NAIC model disclosure language.

Robert G. Gruber, offering testimony as an Independent Broker

Mr. Gruber, who is also a trustee for NAIFA, spoke against mandatory disclosure.

Kurt Bingeman, Owner and President, Russell Bond & Co., Inc. on behalf of the American Association of Managing General Agents (“AAMGA”)

Speaking on behalf of the AAMGA, Mr. Bingeman stated that contingency-based commissions are an ethical and legal mechanism of payment.  Licensees operating as insurance wholesalers/managing general agents should not be subject to mandatory compensation disclosure, since no conflict exists when a wholesaler is not the insured’s agent and does not deal directly with the insured. Wholesalers/managing general agents provide unusual or hard-to-place insurance products to retail agents and brokers and have no contact with consumers.

It is the AAMGA’s position that if mandatory producer disclosure ultimately is deemed necessary, that the State of New York should adopt a universal model like that offered by the NAIC, instead of a state-specific model.

Richard Zick, President and CEO, Utica First Insurance Company

Mr. Zick cautioned against treating mega-brokers the same as small brokers, saying that contingency commissions are not a “one-size fits all approach” and are a proper, legal and legitimate agent/broker payment system.  Mr. Zick supports non-itemized compensation disclosure, inasmuch as this information generally is not known at the point of sale.

To view an archived webcast of this hearing, click here.

To read news coverage of this hearing from National Underwriter, click here.

 

July 25 Hearing

Joining the Superintendent and the Deputy Attorney General on the July 25 presiding panel were:

• Robert Easton, Deputy Superintendent and General Counsel
• Matthew J. Gaul, Special Counsel
• Steven Nachman, Deputy Superintendent for Fraud and Consumer Services
• Melvin Goldberg, Assistant Attorney General

Testimony was received from the following interested parties, some of whom had testified in the previous two hearings (to view the complete written statements or testimony of hearing invitee, click on the listed name):

• Dan Glaser, President and CEO, Marsh & McLennan Companies
• Zachary Carter, Marsh & McLennan Companies
• Daniel Maher, Executive Director, Excess Line Association of New York
• William Malone on behalf of the American Association of Managing General Agents
• Brian M. Pozzi, Regional Counsel, Allstate Insurance Company (New York Region)
• Peter Resnick, President and Anthony Calafiore, Legislative Co-Chair, Council of Insurance Brokers of Greater New York
• Thomas E. Workman, President and CEO, Life Insurance Council of New York, Inc.
• J. Stephen (“Stef”) Zielezienski, Senior Vice President and General Counsel, American Insurance Association
• Wesley Bissett, Senior Counsel, Independent Insurance Agents and Brokers of America
• Sharon Emek, Managing Director, CBS Coverage Group, Inc.
• Stephen McGill, Chief Executive Officer, Aon America
• Robert Cusmano, General Counsel, ACE
• Robert P. Hartwig, Ph.D., CPCU, President, Insurance Information Institute
• Don Bailey, CEO North America, Willis Group Holdings
• Birny Birnbaum, Executive Director, Center for Economic Justice
• Janice Ochenkowski, Risk and Insurance Management Society, Inc.
• Gary Ricker, Jr., President, Professional Insurance Wholesalers Association of New York

Arguments presented in favor of continuing to allow contingent and other incentive-based compensation forms for insurance producers included:

• Commissions are a legal and legitimate form of producer compensation which has been time and court-tested
• Compensation forms do not inherently lead to “steering” or other deceptive practices
• Current New York law amply protects consumers, and contingent commissions and other forms of producer compensation should not fall within the present law’s categorization of improper practices
• Eighty-five percent of all companies with sales personnel provide a reward program tied to sales results
• No other states currently ban contingent or other incentive-based compensation
• Banning these compensation forms would put small, locally-based neighborhood agents out of business,  resulting in more mega-brokers and fewer consumers choices
• Contingent and other incentive-based compensation helps align the interests of insurance producers with carriers,  resulting in rates that more accurately reflect varied risk exposure
• Compensation packages containing profitability components encourage agents/brokers to educate, support and train customers and employees on risk control and management practices
• These forms of compensation encourage good working relationships among agents/brokers and underwriters, which is, in turn, good for the consumer
• A strong incentive for accident prevention and a reduction in claim frequency/severity is provided

The main arguments against contingent and other incentive-based or profit-sharing compensation for producers included:

• Contingent and other incentive-based compensation creates a clear conflict of interest.  The vast majority of insurance producers want to remain objective in their recommendations, but that does not eliminate the conflict of interest
• Permitting contingent and other incentive-based commissions creates an unbalanced insurance market 
• Contingent and other incentive-based commissions should be allowed for agents working for a company, but not for brokers who work for the consumer. 

Testimony in favor of mandatory compensation disclosure included the following arguments:

• A better understanding of commissions and bonuses would enable consumers to understand broker sales incentives
• Disclosure would create a better, more open dialogue between clients and producers
• Disclosure would give consumers the opportunity to ask more questions, and thereby make more informed choices, thus allowing the competitive dynamics of the marketplace to determine what forms of compensation survive
• If disclosure of all compensation that could create a conflict of interest was required, the market would find an equilibrium
• Simple transparency of insurance policies alone cannot fix the industry
• The cost to produce compensation disclosure is low and every producer already possesses this information
• Voluntary disclosure has been tried in the past and led to the disclosure of only select information irrelevant to consumers.  Mandatory disclosure would help consumers receive substantive  information
• A recommendation was given that all mandatory disclosures should require (at a minimum): whom the producer represents; all quotes sought and received, including the terms of each quote and all compensation to be received in conjunction with each quote; and the types of contractual and other relationships the producer has with those insurers approached, including the nature and level of any contingent commissions

Testimony against mandatory compensation disclosure included:

• Mandating disclosure would increase a producer’s operating costs, which would then be passed to the consumer
• Mandatory disclosure would unfairly discriminate against independent agents and brokers and companies that rely on agents, rather than advertising, telemarketing and salaried employees.  If direct writers and captive agents are excluded from mandatory disclosure, an unlevel playing field would be created
• Many agents and brokers already voluntarily disclose compensation arrangements to current and potential clients, including fixed commissions
• Profit-sharing arrangements are calculated at year’s end and are not tied to a specific policy, contract, or client, so there is no way for a broker to know what initial commissions he or she might earn
• Mandatory compensation disclosure would be confusing to consumers, and draw attention away from the policy’s ability to meet the customer’s needs
• If, after disclosure, a client wants to negotiate a lower commission rate to reduce his or her premium payment amount, the producer is prohibited from doing so under current regulation.  It is believed that this would create distrust between consumers and producers and could lead to the illegal practice of rebating, in which a producer gives up a portion of their commission in order to make a sale
• Total or net cost of a policy is more important for consumers to understand than how much money the producer makes.  The total policy cost method allows for direct policy comparison and typically is presented to consumers as a matter of course
• Focusing solely on agent commissions by mandating disclosure could lead to a misunderstanding of the total policy cost, thereby encouraging buyers to look for the policy with the lowest commission rate, rather than the policy that best suits their needs
• Mandatory disclosure should not be required for licensees who operate as insurance wholesalers/managing general agents—these producers have no conflict of interest because they do not deal directly with the consumer, and instead sell coverage to retail agents and brokers

Further testimony primarily supported adoption of a universal model across the United States, with four speakers offering support for model disclosure language promulgated by the NAIC and one speaker offering support for the National Conference of Insurance Legislators model. 

Speakers urged that any regulation enacted should create a level playing field for all companies, and promote healthy, efficient markets. 

Testimony against further regulation cited transparency as a fix for any conflicts of interest and the will of the free market as a good way to decide acceptable compensation forms and amounts.  Overall, speakers agreed that New York’s regulatory system treats insurance producers and consumers fairly.

To view an archived webcast of this hearing, click here.

To read news coverage of this hearing from Insurance Journal, click here.

 

If you have any questions or comments, please do not hesitate to contact Colodny Fass.