| Virginia
joins probe of insurance practices
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by
Joan Tupponce
Virginia Business
December
2004
State
insurance regulators from around the country will gather
in New Orleans early this month, but the hot topic at
their winter meeting will likely not be jazz or Cajun
food. The regulators plan to hold a closed-door session
on the allegations of bid rigging and price fixing raised
by New York Attorney General Eliot Spitzer in an investigation
of insurance brokers.
Attending the meeting will be Alfred W. Gross, Virginia’s
commissioner of insurance, who has started his own investigation
of insurance brokerage practices in this state as a
result of New York’s lawsuit against Marsh &
McClennan Cos. The agency Gross heads, the Bureau of
Insurance of the State Corporation Commission, is investigating
whether brokers violated a Virginia law requiring insurance
consultants to disclose all compensation they receive
for placement of their clients’ insurance coverage.
Gross also wants to know if any Virginia client of insurance
brokers is directly affected by the New York lawsuit.
The
insurance industry has been scrambling to assess the
damage since Spitzer filed the lawsuit on Oct. 14. The
suit charges that Marsh, the nation’s largest
insurance broker, cheated corporate clients by rigging
insurance bids and steering business to certain major
insurers to collect large fees. American International
Group Inc., Ace Ltd., Hartford Financial Services Group
and Munich-American Risk Partners were named in the
suit as insurance companies that participated in the
alleged scheme. Two AIG managers and one Ace executive
have pleaded guilty to felony charges stemming from
the investigation. Also, two senior underwriters at
Zurich American Insurance Co. pleaded guilty to misdemeanor
charges.
The New York investigation took a turn in mid-November
when Spitzer filed suit against Universal Life Resources.
The suit alleges that insurance companies including
MetLife Inc., Prudential Financial Inc. and Unum Provident
Corp. agreed to side deals with ULR, paying it millions
for steering corporate life and disability insurance
business to the insurers.
The regulation of insurance is handled by the states.
Spitzer’s actions have prompted a number of them,
including California and Connecticut, to start their
own investigations. In addition, the National Association
of Insurance Commissioners has formed a task force to
review broker compensation and disclosure arrangements
with an eye toward developing a model statute.
Some industry observers have renewed calls for federal
oversight of insurance, saying state regulation is too
fragmented. But Gross says federal regulation is unnecessary.
“I hope that state regulators will step up and
take care of this problem,” he says.
The industry should expect change no matter who regulates
it, says Dr. Etti Baranoff, associate professor of insurance
at Virginia Commonwealth University. Baranoff, a former
Texas insurance regulator who has written extensively
on regulatory history, expects an “avalanche”
of investigations and lawsuits nationwide. “Honest
people suffer when things like this are done,”
she says. “There is a chain reaction leading to
higher premiums and more expensive consumer products.
Everyone pays more.”
Many Virginia brokers are concerned about the effects
of the investigations on public perception of the industry.
Robert C. Moore, principal and CEO of Tabb Brockenbrough
& Ragland LLC in Richmond, believes brokers may
be chastised for the alleged wrongdoings of a few. “I
worry about the buyer of insurance products, thinking
we are all cast in this light,” he says.
The Spitzer investigation already has caused dramatic
changes at Marsh. Its stock has plunged, Chairman and
CEO Jeffrey W. Greenberg has resigned, and the company
has announced plans to lay off about 3,000 employees.
Greenberg’s departure was seen as a step by Marsh
to reach a settlement with the attorney general, who
was highly critical of the company’s top management.
Spitzer now plans to forgo any criminal charges against
Marsh. Gross believes that decision will give his bureau
access to documents collected in Spitzer’s case.
The insurance commissioner says that Virginia’s
law calling for full disclosure on “commissions,
incentives, bonuses, overrides or any other form of
remuneration either directly or indirectly” provides
him with the tools needed to pursue his investigation.
The SCC can fine companies for violating the law if
they fall under the state’s regulatory authority.
Any evidence of criminal activity would be passed on
to the attorney general’s office. A spokesman
for Attorney General Jerry Kilgore declined to comment
about any possible probe by that agency.
Spitzer’s initial lawsuit centers on the alleged
abuse of contingent commissions. Insurance companies
commonly pay additional fees to brokers who, in placing
coverage for clients, reach certain profit or volume
targets. Gross says contingent fees are “acceptable
as long as they are disclosed … as long as the
client has informed choice.’”
Nonetheless, Gross isn’t ruling out the chance
that commission structures may change as a result of
the current allegations. Bob Bradshaw, executive vice
president of Independent Insurance Agents of Virginia,
says that his organization supports full disclosure
of commissions. “Some of the people I have spoken
to have indicated surprise that they can ask the agent
what the agent is making on the sale of the business
and what is the contingent fee arrangement,” he
says.
Yuille Holt III, president of Campbell Insurance in
Lynchburg, worries that the controversy may prompt insurance
companies to stop providing contingent commissions.
“We have the herd mentality in this industry.
If one does, others will follow suit,” he says.
“Whatever the outcome, it needs to be fair to
the consumer and fair to the insurance agent.”
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