Gubernatorial Hopefuls in New York: Spitzer vs. Weld
New York Attorney General Eliot Spitzer has made a name for himself exposing fraudulent and anti-competitive business practices in the securities, mutual fund and insurance industries. Now he is running for governor in New York and is given excellent odds to win the Democratic nomination. Current polls also show him the favorite versus potential Republican opponents, including William Weld, whose insurance politics were reported on last issue.
Spitzer’s candidacy has spurred interest about what insurance politics and regulation in the Empire State might look like if he is elected to succeed Republican George Pataki.
One year ago this month, Spitzer shocked the industry with his charges of bid rigging and corrupt practices at Marsh. Within months, his investigations had expanded to other insurance brokers and insurance companies, including American International Group. Other states began their own probes. Wall Street insurance brokers Marsh, Aon and Willis have since settled with Spitzer, paying restitution and agreeing to change their compensation policies. Meanwhile, his office is pursuing additional probes over finite reinsurance, insurer accounting and workers’ compensation pricing.
These investigations have kept Spitzer in the public spotlight and boosted his political appeal as a crusader against corporate corruption.
While he has been rising in the polls, some have criticized him for the way he has gone about his business. Ernie Csiszar, president of the Property Casualty Insurers Association of America, has blasted what he called Spitzer’s “corporate terrorism” approach. U.S. Chamber of Commerce President Tom Donohue called his settlements with businesses “the most egregious and unacceptable form of intimidation that we have seen in this country in modern time.” State GOP Chairman Stephen Minarik has claimed that Spitzer’s high-profile investigations are “making it harder to do business and create jobs in New York.” His political opponent William Weld told The Associated Press in August that Spitzer “has a marvelous public persona right now, based 100 percent on terror power, the power of ruination.”
Spitzer dismisses such critics as apologists for corrupt practices and not the true defenders of free markets they claim to be. “Those who supposedly speak for the free markets refuse to acknowledge that we’ve been right in these cases,” he has countered. “Instead, they recede into a shell of ossification, pretending that these issues should not have been addressed in the first place.”
In a commentary in the Wall Street Journal, Spitzer explained why he thinks such powerful interests oppose his methods:
“Part of the reason is a mistaken belief that enforcement is bad for the economy. This is a major misconception rooted in an outdated ideology that fixates on examples of intrusive government regulation in the distant past. Today’s situation is qualitatively different. We are now combating a series of problems arising almost exclusively from the abandonment of basic concepts in business ethics-concepts like fiduciary duty, transparency, accountability and fair play. This conduct betrays the core principle of our economic system: full, fair competition. Prosecutors are compelled to respond, and they have done so in ways that are targeted and measured.”
Long-term benefits
While many are still upset with what they see as the reputation bashing of the entire industry for the faults of a few, more and more insurance executives are acknowledging that the upheaval caused by Spitzer could benefit the industry.
“I think out of this comes a better industry with better companies,” Stephen Lilienthal, chairman, CNA Financial Corp., said at Standard & Poor’s 2005 conference in New York in June. He said this kind of evaluation of regulation was overdue and “catch-up” would be difficult.
“At the end of the day this will create a more transparent industry and I welcome that,” agreed Brian O’Hara, XL Capital Ltd., chief executive officer.
The top brokers have halted contingencies but mid-sized and smaller agencies have generally opted for disclosure over discontinuance of traditional compensation arrangements.
While they have caused displacement, it’s not clear whether Spitzer’s crusades have cost jobs. There are reports that some mid-sized brokers are expanding as they lure accounts previously locked up by the big brokers. Also, at least one new New York broker has been formed.
In an age when many business and political leaders continue to argue for deregulation, Spitzer has articulated the need not necessarily for additional regulations but for government to be a more active enforcer of rules so that free markets operate fairly for all businesses and consumers. In remarks before the National Press Club in January, in which he spoke of the influence of “trust busting” Teddy Roosevelt, the AG said:
“Business, in many cases, will descend to a lowest common denominator. And if we believe that the market depends upon integrity and fair dealing, then government must step in to make sure that the rules are honored.”
While he has questioned a few moves by New York’s own insurance department, Spitzer has overall been an advocate of strong state regulation, choosing instead to level his major barbs at federal authorities and laws.
He has argued that some problems within the industry such as offshore entities and ratemaking practices may require federal intervention. He has also hinted there is a need for minimum national standards for insurance professionals.
He supports repeal of the McCarran-Ferguson antitrust exemption enjoyed by the insurance industry. In comments submitted in July to a federal commission, Spitzer wrote:
“The exemption has interfered with the ability of public and private enforcers to readily use the full panoply of federal antitrust remedies to correct, deter and obtain compensation for abuses in the insurance sector. A uniform federal antitrust standard would facilitate antitrust enforcement and benefit plaintiffs and defendants alike, in contrast to disparate actions, under different laws, that may yield inconsistent results.”
At the same time, Spitzer defended state regulation, arguing “repeal of the exemption should not require preemption of state regulatory systems, which comprehend far more than antitrust policy, and are consistent with a preference for competition in this critical sector of the nation’s economy.”
As AG, Spitzer has not had to take positions on many specific New York insurance issues but he has been involved in prosecuting insurance fraud and upholding insurance-related laws. In 2000 his agency reviewed the plan to convert Empire Blue Cross to a for-profit entity. Spitzer did not oppose the conversion, claiming it was his job to ensure that it complied with the law and not to resolve the public policy questions involved. He did obtain concessions from Empire that preserved the firm’s charitable assets for the benefit of the public. He later backed legislation to incorporate some of these protections into a new state law permitting conversions.
Since May 2001, the AG’s office has been a special prosecutor in the state’s increasingly successful battle against auto insurance fraud. In August 2004, in a case involving phony personal injury claims, his lawyers broke new ground in using the so-called “enterprise corruption” charge that has been traditionally used in organized crime cases.
On a number of occasions, Spitzer has argued for stronger laws to curb drunk driving and protect victims of identity theft.
Albany atmosphere
As governor of New York, Spitzer would not be prosecuting wrongdoers or fixing federal laws and agencies. Nor would he be sparring with Ernie Csiszar or Tom Donohue. He would instead be communicating state public policy priorities, working with budgets and bureaucracies in Albany, and meeting with lawmakers including Democrat Assembly Speaker Sheldon Silver and Republican Senate President Joseph Bruno.
Unless one party makes remarkable gains, Spitzer is likely to face a familiar political equation in Albany. Democrats control the New York Assembly, while Republicans have a slight edge in the Senate. In this Albany atmosphere under Republican Gov. Pataki, the industry has achieved some gains, notably major workers’ compensation reforms in the mid-90s, more streamlined producer licensing and various tools against auto insurance fraud. But recent workers’ compensation and labor law reforms have stalled.
“I don’t think the dynamic would change much from a specific insurance issue standpoint,” said Michael Barrett, lobbyist for the Independent Insurance Agents and Brokers of New York. Any change in the Albany atmosphere “would depend on what Spitzer would have on his agenda and we don’t know that as yet.”
Barrett would like to know Spitzer’s thoughts on compensation for agents and brokers, workers’ compensation, the labor law, auto insurance fraud, the federal terrorism insurance act and whether a catastrophic fund makes sense.
“We haven’t seen much from him on insurance issues,” explained Barrett, suggesting that more might be known in a month or so after his group meets with Spitzer.
As the assistant executive director for government and industry affairs for the Professional Insurance Agents of New York, Ellen Kiehl has been watching Spitzer closely. Kiehl acknowledges that the AG’s stands on insurance issues are largely a mystery at this point but she is encouraged by his willingness to avoid taking one particular stand. While forcefully condemning contingent commissions and related activities by Wall Street brokers, Spitzer has never supported a legislative mandate to prohibit all contingency fees or mandate disclosure by all agents.
In his January appearance before the National Press Club, Spitzer said that he did “not want to paint the entire industry with a broad brush.” His settlements with the mega-brokers include prohibitions that they not accept contingent commissions but Spitzer has not said that such fees should be banned industry-wide. The problem at Marsh was that such fees were being used in ways that “fundamentally” distorted the marketplace, abused fiduciary duties and inflated premiums, he has pointed out. “There may be other contexts where contingent agreements might not usurp decision-making and fiduciary duty,” he said.
Also in early 2005, during an Assembly Committee on Insurance hearing, Assemblyman Alexander “Pete” Grannis, chairman, grilled officials on what should be done to protect consumers from conflicts of interest arising from contingent fees. Pressed by committee members as to what lawmakers should do, Spitzer said it was possible that stronger enforcement, rather than new laws, might be the correct response.
Kiehl is not concerned by the fact Spitzer has had so many negative impressions of the insurance industry; it may in fact be a blessing that he has delved so deeply into the business.
“He is a very high profile figure and not only in the context of insurance but other financial services,” Kiehl commented, stressing that financial services industries are basic to the state’s economy. “As a very active attorney general, he has certainly had a lot of dealings with the insurance industry and this suggests that he knows a great deal about the inner workings of the industry. That could be a positive.”
If elected governor, Spitzer’s chief impact on insurance would probably be in the person he names to run the insurance department. Howard Mills, the current occupant, is a Republican who has worked with Spitzer’s office on its investigations but who for political reasons is unlikely to be retained.
“His record suggest he would emphasize consumer services and market conduct and that complaints would be pursued,” said Kiehl.
But, she quickly added, that would not necessarily be much different from the way the department now operates under Republicans.