On Wednesday, July 23rd and Friday, July 25th, the New York State Insurance Department and the New York Attorney General held the second and third public hearings in a series of three hearings concerning producer compensation and disclosure of fee arrangements to consumers. The second hearing on July 23rd was held in Albany and the third hearing on July 25th was held in New York City. To see our coverage of the first hearing held in Buffalo on July 14th, click here.
The hearings covered different types of producer compensation, whether and how that compensation should be disclosed, and, if certain forms of compensation incentives lead to broker actions that are not in the best interest of their clients, what regulations will most effectively curb such activity.
Nine witnesses testified during the Albany hearing while 18 gave testimony at the hearing in New York City. Those testifying gave differing views on disclosure requirements and contingent commissions.
Proponents of full transparency included representatives form the world’s largest insurance intermediaries, including Steve McGill, Chairman and CEO of Aon Risk Services and Daniel Glaser, Chairman and CEO of Marsh, Inc. Their position is that “[i]f all producers fully disclose their compensation, clients can make informed choices and the competitive dynamics of the marketplace will determine what forms of compensation survive.” According to Mr. Glaser, the current settlement agreements should be replaced with an industry-wide solution that is “fair and consistent” for all producers and addresses the interests of policyholders.
Others disagreed with the full disclosure paradigm, and used pointed examples of where full disclosure of compensation may actually be counterproductive. Thomas E. Workman, President and CEO of the Life Insurance Council of New York, Inc., gave the following illustration in his written testimony:
"If an insurance producer were to provide a customer with a spreadsheet showing what compensation would be paid if the business were placed with any of several specific insurers, what does that really tell the customer about the benefits of the coverage, or the likelihood that it will meet his or her needs? Is the customer to assume the product that provides the least amount of compensation to the producer will best meet his or her insurance needs? Conversely, if the producer recommends a product sold by the insurer that pays the highest level of compensation, is the customer to infer that product is inappropriate for his or her needs? What if the product that provides the highest compensation to the producer is also the most appropriate product for that customer?"
However, Mr. Workman did agree that producers should be required to disclose to the customer and obtain documented acknowledgement if the broker will receive compensation from the insurer in addition to that already received from the customer.
Contingent and Supplemental Commissions
Advocating for the end of contingent and supplemental commissions, Janice Ochenkowski, President of the Risk & Insurance Management Society, Inc. (“RIMS”), stated that contingent and supplemental commissions create an inherent conflict of interest for brokers and independent agents in transactions that are made on behalf of the buyer. This is due to the consumer’s reliance on the insurance broker or independent agent for expert advice, guidance, product information, comparison pricing, and the expectation that the insurance broker or independent agent is working on his or her behalf. Further, Ms. Ochenkowski stated in her written testimony that RIMS believes “the best way to serve the insurance consumer is to level the playing field by eliminating such compensation arrangements for any and all brokers or agents acting on behalf of a buyer.”
In opposition to the expansion of the ban on contingent commissions to all insurance producers in New York, representatives from independent insurance broker associations such as Peter N. Resnick, President of the Council of Insurance Brokers of Greater New York, Inc. (“CIB”), point to the fact that if the “mega-brokers” operate at some competitive disadvantage through an un-level playing field, they brought it upon themselves by their own misdeeds. According to Mr. Resnick, while the CIB supports efforts “to end the practice of illegal bid-rigging, price fixing and acceptance of kickbacks for steering lucrative insurance accounts to complicit insurers,” throwing the “baby out with the bathwater” is unnecessary, as compensation compliance disclosure guidance already issued by the New York State Insurance Department coupled with the voluntary disclosure by many brokers shows that the market is operating soundly.
With many interests represented over the past three hearings, it is clear that the issues discussed are not black and white, as supporters of full disclosure do not necessarily also support an end to contingent commissions. Mr. McGill believes “contingent commissions … should be allowed to continue, but with more detailed disclosure.” Such incentive compensation, according to Mr. McGill, does not create a conflict of interest that automatically results in steering clients to a less favorable insurer in order to maximize profits.