Agent Compensation Disclosure: Distinguishing between Main Street and Wall Street
Illinois’ Department of Insurance is continuing to investigate the commission practices of its independent agents, and the rest of the country is keeping an eye on what’s happening there.
Last October’s action by New York Attorney General Eliot Spitzer in suing brokerage Marsh & McLennan for alleged bid- rigging had a “tornado effect” and is still being felt in the states, said Michael J. Tate, chief operating officer for the Professional Independent Insurance Agents of Illinois, at the PIIAI annual convention last month in Springfield. Since then, 25 different state attorneys general filed along with Spitzer, individual executives have been indicted, and state regulators have been spurred to take action with their own investigations. Most aggressive have been New York, Connecticut, West Virginia and California.
In Illinois, this has translated to an investigation with heavy political overtones. When Spitzer hit, the Illinois Division of Insurance launched its own investigation by issuing subpoenas to 30 agencies and most domestic insurers, requesting all records regarding agent compensation. Spearheading the investigation was class-action attorney Myron Cherry, a special examiner with ties to Illinois Gov. Rod Blagojevich, Tate said. Concurrently, Illinois Attorney General Lisa Madigan pursued her own investigation.
Legislators got into the act during the spring session, when two separate bills were introduced. Sen. Susan Garrett (D-Lake Forest), backed by the AG, promoted S.B. 2016, which resembled the model created by the National Association of Insurance Commissioners (NAIC) by establishing a unique and cumbersome disclosure requirement on all Illinois insurance agencies. The bill was defeated in the Senate Insurance Committee.
After Aon, Gallagher and other large brokers agreed to settlements, the DOI then turned to independent agents for scrutiny of their commissions practices. So far more than 30 independent agencies have been subpoenaed to submit data and information regarding their compensation systems with the insurers they represent. Controversy boiled when Cherry billed some agencies for their own defense; one brokerage reportedly received a bill for $1 million in legal fees, Tate said. Since then, Cherry has been terminated from his special investigator position at the DOI.
Throughout the investigation process, PIIAI and other industry groups attempted to educate legislators and regulators on the essential differences “between Wall Street and Main Street” insurance business practices, Tate said. Ongoing meetings between the parties have characterized the tenure of outgoing PIIAI President James W. Ander, who had met three times with the DOI, twice with the AG, and several times with the Senate and House committees. Explaining the distinction between the practices of large brokerages and PIIAI member agencies was “fighting an uphill battle,” he noted. Along with the bid-rigging complaints, investigators were also focusing on placement service arrangements, or PSAs, a compensation system typically employed by large multinational brokerage houses, not Main Street agencies.
At the last meeting between PIIAI and the DOI, Director Mike McRaith specifically addressed agency business, concerned about consumer protections since independent agency clients are less sophisticated, Tate said. PIIAI countered with the fact that profitsharing is how American businesses work, and that volume compensation is a common practice, used by 279 different types of businesses, including insurance. In fact, a glance through the Yellow Pages will show a surfeit of insurance agencies, a good sign of competition which is good news for insurance buyers, he added.
PIIAI is concerned about McRaith’s vision of disclosure, which would be for agencies to provide all their formulas for profitsharing and an estimate of what they will receive from each arrangement–a burdensome and unnecessary procedure that will only confuse consumers, said Phil Lackman, PIIAI’s vice president of government relations.
PIIAI and other industry groups support the model proposed by the National Coalition of Insurance Legislators (NCOIL), which fits with existing regulations by requiring written disclosure if an agent accepts commissions exceeding 10 percent of premiums. So far, only Nevada has adopted and passed the NAIC model law, which is good news for the industry. Other states, including Connecticut and Texas, have adopted NCOIL legislation, which would be a good move for Illinois.
In an attempt to placate investigators and protect its members and consumers, PIIAI developed a model “Agency Compensation Disclosure” form, which briefly outlines for insurance buyers the practices of standard commissions and additional compensation systems used by insurers to pay agents and brokers. The document underlines current state law by stipulating that agents charging a fee must disclose this fact to the buyer in writing, and if the fee exceeds 10 percent of premiums, the consumer’s written acknowledgement is required.
PIIAI hopes education, coupled with the voluntary use of the disclosure statement, will head off any future onerous legislation in the upcoming Illinois legislative session.