Local insurance brokers react to industry investigation

New York Attorney General Eliot Spitzer's investigation of the insurance industry may lead to a regulatory shake-up in Pennsylvania, officials here said. But area brokers insisted they were continuing to do business as usual.

Controversial incentives some insurance companies may offer brokers

Koken led a 13-state committee that drafted the suggested legislation, which would require insurance agents and brokers - working directly for a carrier or independently - to make extensive disclosures to clients about how carriers pay them. At a minimum, they would have to point out if their own compensation depends on the carrier or product the client ultimately chooses. Koken is president of the National Association of Insurance Commissioners, an organization of all state regulators of the insurance industry, which has no federal supervisor. NAIC plans to formally endorse the legislation by the end of the year.

NAIC also plans to develop a template that state regulators can use to review the insurance marketplace for inappropriate practices and set up an online system to collect tips.

Meanwhile, state Sen. Gibson E. Armstrong, chairman of the Senate Banking and Insurance Committee, plans to hold hearings on the industry in Pennsylvania early next year, according to an Armstrong aide. Armstrong, a Republican, represents parts of Lancaster and York counties.

Chris Latta, Armstrong's chief of staff, said the hearings likely would focus on incentive payments from insurance companies to brokers. Insurance companies may offer the incentives, known as "contingency fees," on top of standard commissions to reward brokers for referring high-volume or profitable business. Brokers are retained by clients seeking coverage.

"Does that set up a split loyalty that is inappropriate?" Latta asked rhetorically. He said contingency fees were legal. "The question is: Is it appropriate? And if it's not, then should we make it illegal?"

Koken's proposal would require brokers to disclose both the standard commissions and the contingency fees, according to the NAIC. The state insurance department says neither must be disclosed under existing law.

The operating subsidiary of Spitzer's primary target, Marsh & McLennan Cos., has a Harrisburg office and reported a local premium volume of $210 million in 2002, the highest in Central Pennsylvania, according to Business journal research.

The office of the Pennsylvania attorney general said it has subpoenaed Marsh Inc., the company's risk and insurance unit, for contracts with any state or local agency or school board in the state.

"Obviously, our clients have made inquiries, and we've responded," said Al Modugno, a senior vice president of Marsh. He declined to say how much of the company's Pennsylvania revenue is with public agencies.

Other Central Pennsylvania brokerages are assuring clients their business practices are sound.

Murray Insurance Associates of Lancaster is sending clients who inquire about the situation a letter that declares, "They are Wall Street - We Are Main Street." The letter, using language suggested by the independent Insurance Agents & Brokers of America Inc., states that the practices Marsh is accused of are rare. For the most part, it states, smaller insurance agents and brokers are compensated only through standard commissions. Even occasional incentive agreements do not relate to any specific insurance contract, according to the letter. '"Steering' a client into an unsuitable policy would be counterproductive. We can assure you that we find this kind of behavior unethical," the letter states.

Spitzer sent shockwaves through the industry last month when he attacked Marsh on two counts. First, he accused the brokerage of illegally colluding with insurance companies to rig bids on contracts. Marsh would solicit an artificially inflated bid from one company to make another's offer look better, Spitzer alleged. He also came down on the receipt of contingency fees, which he said corrupt the insurance marketplace, according to a statement from his office.

Some types of contingency fees are viewed as legal and commonplace in the industry, but local brokers said these differ from those that Marsh received. Marsh, the largest insurance brokerage in the world, said in October it would no longer accept the fees under scrutiny.

Modugno would not comment on how the move would affect Marsh's local operations, but other local brokers said there was no reason for them to follow suit.

Smaller, independent insurance agencies operate differently from huge firms such as Marsh, local observers said.

"There's just a different world of relationships," said Rick Russell, chief executive officer and president of Insurance Agents & Brokers in Cumberland County. The membership organization, based in Upper Allen Township, represents more than 1,600 independent insurance agents in Pennsylvania, Maryland and Delaware.

Hank Christ, president and CEO of Springettsbury Township-based E.K. McConkey & Co., said brokerages that are not national in scope rely heavily on commissions. But, the critical difference is the vast majority of those commissions is not contingent on profitability, he said. Commissions based on "profit-sharing" account for less than 5 percent of his firm's business and are never tied to individual accounts, Christ said.

Greg Gunn, managing partner of Gunn-Mowery Insurance Group, an independent insurance agency based in Camp Hill, said he discloses contingency fees to his 25 largest clients. With smaller clients, he discloses the fees only if the clients ask or the issue comes up.

Samuel Lombardo, president and CEO of The Benecon Group' said contingency fees should be disclosed to clients if they are built into the insurance rates the clients are charged. If the incentives are not reflected in the insurance rates, then not knowing about them does the client no harm, he said.

The Benecon Group provides brokerage and consulting services on both a fee-for-service and a commission basis.

"I think that this is an isolated situation that is taking place," Lombardo said.