| Executives
waiting to see how probes affect industry
by Joan Tupponce
Virginia Business
May 2005
Call it the lull after the
storm. The insurance industry is still assessing
the damage from what many call the “Spitzer
storm” that blew in from New York more than six
months ago.
Like a series of tornadoes,
the lawsuits and investigations unleashed by the
actions of New York Attorney General
Eliot Spitzer scored direct hits on some insurance
giants, such as Marsh & McLennan Cos., while leaving
much of the industry landscape unscathed.
In the calm that has followed
an initial flurry of activity, many insurance executives
around Virginia
are wondering: What’s next? Have abuses been
found and corrected or will there be an attempt to
make wholesale changes in the industry?
The turmoil began in October
when Spitzer filed suit, alleging that Marsh, the
nation’s largest insurance
broker, had colluded with major insurance companies
to deceive clients. The suit charged that Marsh used
kickbacks and bid rigging to ensure that it collected
contingent fees. These are fees that insurance companies
pay to brokers for hitting certain volume or profit
targets.
The New York investigation
of insurance practices has shaken up the nation’s top three brokers,
Marsh, Aon Corp. and Willis North America. Marsh settled
Spitzer’s lawsuit by establishing an $850 million
fund to compensate clients. Aon and Willis agreed to
pay $190 million and $50 million, respectively, to
end probes involving them. All three adopted reforms
to end the use of contingent fees.
Spitzer’s actions prompted a number of other
insurance probes across the country. Virginia’s
Bureau of Insurance, for example, began investigating
whether any brokers violated a Virginia law requiring
insurance consultants to disclose all compensation
they receive for placing their clients’ coverage.
That investigation is ongoing. “The whole Marsh
issue centered on a handful of employees who were involved
in illegal issues,” says Brian Gaudiose, deputy
commissioner of agent regulation and administration
for the Bureau of Insurance. “We don’t
want to overreact to the situation, but we do have
to take a systematic, objective approach to the issues
that were raised in the Marsh investigation.”
One Virginia company affected
by the subsequent investigations is Richmond-based
Hilb Rogal & Hobbs Co., the world’s
eighth largest insurance and risk management intermediary.
The company says that it has received requests for
information about business practices from 10 state
departments of insurance and subpoenas from four state
attorneys general. HRH says it intends to cooperate
with all requests.
The company also says that
it has been named “as
a defendant in three purported class-action suits related
to past business practices, which the company intends
to vigorously defend.” HRH notes that it “will
monitor broker compensation practices and, as warranted
by market and regulatory developments, will review
its compensation arrangements with underwriters.” No
company executive could be reached for comment on these
developments.
While its members have been investigating the business
practices of brokers, the National Association of Insurance
Commissioners has adopted a model insurance broker
disclosure law. Under the proposed law, brokers are
required to disclose to clients the amount of compensation
they receive from insurance companies and the method
for calculating compensation, including any contingent
fees. The NAIC also created an Executive Task Force
on Broker Activities to consider additional requirements,
such as disclosing all quotes received by a broker
and any information relating to agent-owned reinsurance
arrangements. In addition, the association has begun
an online insurance fraud reporting system.
NAIC President Diane Koken,
who is Pennsylvania’s
insurance commissioner, says the organization “made
a promise to consumers and the industry to get to the
bottom of this matter as quickly as possible, resolving
to develop and put into place a tangible action plan
for state insurance regulators. With passage of this
model legislation, we are delivering on that promise.”
Gaudiose, the Virginia insurance
regulator, says reaction to the proposed disclosure
law has been mixed. “Some
people think it goes too far,” he says. “Some
think it doesn’t go far enough.” Virginia
has not attempted to adopt the model legislation because
it already has a disclosure law. “We have good
disclosure laws now,” he says. “There is
no evidence that we need anything else.”
Bob Bradshaw, the executive
vice president of the Independent Insurance Agents
of Virginia, is pleased
with the state’s response to the issues raised
by the New York investigation. “The Bureau is
doing their due diligence to see if there is a problem
in the state,” he says. “They have surveyed
agencies, mostly on the large side, asking questions
about their operations to see if there are any problems.”
Bradshaw doesn’t see the Spitzer lawsuit as
an indictment of the entire industry He contends that “to
some degree it has helped create dialogue where one
didn’t exist between commercial consumers and
some independent agents.”
Tom Welch disagrees. The president
of Welch, Graham and Ogden Insurance in Chantilly
believes that the
lawsuit against Marsh blackened the industry’s
reputation. But, he says, it hasn’t changed the
way his company does business. “Marsh is a super
giant in the insurance industry, not a Main Street
agent. We don’t have a problem telling clients
how much we make when we write their policies.” Welch
believes that all transactions should be transparent. “Agencies
need to win the trust of their clients,” he says. “You
want them to know that there are no shenanigans going
on.”
Walker Sydnor, president of
Lynch-burg-based Scott In-surance, says he has seen
little fallout from the
investigation. “We did receive a letter from
the Bureau of Insurance asking 12 questions,” he
says. “They wanted us to respond to each and
let them know if we were aware of any similar situations
[to Marsh].” As far as contingent fees are concerned,
Sydnor believes that if handled correctly, the fees
are “an ethical, fair way to be compensated.”
The media attention generated
by the lawsuit has made clients more aware of the
way in which agents
are compensated. “Clients are asking more questions,” says
Charlie Nusbaum, president of S.L. Nusbaum Insurance
Agency, Inc. in Norfolk. “They know that we are
going to take care of them. When you deal with small
to medium accounts you have to follow guidelines.”
Virginia is a leader in regulation,
he adds. “The
Bureau of Insurance in Virginia is one of the top government
organizations. People look to our state for leadership
and guidance.” He doesn’t believe the industry
needs federal overrides. “We have enough government
as it is,” he says. “It’s our job
to make sure things are done right.”
The issues generated from
the lawsuit are complex, says Etti Baranoff, associate
professor of insurance
and finance at Virginia Commonwealth University. “Part
of what is happening with brokers has to do with the
fact that half of the states don’t have brokers’ statutes.
The federal government is seeing a lack of uniformity
and trying to do something about it. To me federal
regulation is going to come closer and closer.”
It remains to be seen if the
questions raised about commercial insurance will
affect other types of insurance.
Gaudiose doesn’t see the problem spilling over
into the area of personal lines. Nonetheless, he notes
that insurance consultants are involved with group
health insurance coverage. “We are going to look
everywhere [during the investigation],” he says.
Tom
Welch disagrees. The president of Welch, Graham and
Ogden Insurance in Chantilly believes that the lawsuit
against Marsh blackened the industry’s reputation.
But, he says, it hasn’t changed the way his
company does business. “Marsh is a super giant
in the insurance industry, not a Main Street agent.
We don’t have a problem telling clients how
much we make when we write their policies.” Welch
believes that all transactions should be transparent. “Agencies
need to win the trust of their clients,” he
says. “You want them to know that there are
no shenanigans going on.”
Walker
Sydnor, president of Lynch-burg-based Scott In-surance,
says he has seen little fallout from the investigation. “We
did receive a letter from the Bureau of Insurance
asking 12 questions,” he says. “They
wanted us to respond to each and let them know if
we were aware of any similar situations [to Marsh].” As
far as contingent fees are concerned, Sydnor believes
that if handled correctly, the fees are “an
ethical, fair way to be compensated.”
The
media attention generated by the lawsuit has made
clients more aware of the way in which agents are
compensated. “Clients are asking more questions,” says
Charlie Nusbaum, president of S.L. Nusbaum Insurance
Agency, Inc. in Norfolk. “They know that we
are going to take care of them. When you deal with
small to medium accounts you have to follow guidelines.”
Virginia
is a leader in regulation, he adds. “The Bureau
of Insurance in Virginia is one of the top government
organizations. People look to our state for leadership
and guidance.” He doesn’t believe the
industry needs federal overrides. “We have
enough government as it is,” he says. “It’s
our job to make sure things are done right.”
The
issues generated from the lawsuit are complex, says
Etti Baranoff, associate professor of insurance and
finance at Virginia Commonwealth University. “Part
of what is happening with brokers has to do with
the fact that half of the states don’t have
brokers’ statutes. The federal government is
seeing a lack of uniformity and trying to do something
about it. To me federal regulation is going to come
closer and closer.”
It
remains to be seen if the questions raised about
commercial insurance will affect other types of insurance.
Gaudiose doesn’t see the problem spilling over
into the area of personal lines. Nonetheless, he
notes that insurance consultants are involved with
group health insurance coverage. “We are going
to look everywhere [during the investigation],” he
says.
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