This Just In: Industry Conduct After Spitzer Shows Old Habits Die Hard

The multiple investigations triggered by New York Attorney General Eliot Spitzer a little more than one year ago have thus far tarnished the insurance industry’s public image more than they have changed its private behavior, according to experts at a recent Manhattan seminar.

Marsh, Aon and the other large brokerage houses caught up in the investigations have had to pay restitution and agree to halt certain practices. But for the rest of the industry, which has maintained it was not doing anything wrong in the first place, it appears to be business-as-usual.

The seminar, titled “The New Ethics of Insurance,” was hosted by the eastern chapter of the Professional Liability Underwriting Society. The panelists sought to measure the insurance scandals not only in dollars (see sidebar) but also in how they have changed the industry.

“There is a heightened level of sensitivity. Most of the scrutiny has been directed at brokers but even companies have to weigh how they conduct their business,” claimed Stephen Sills, chief executive officer, Darwin Professional Underwriters, Farmington, Conn.

Perhaps the most sensitivity surrounds the media’s role in the investigations.

Blame game

Much of the industry’s bad image can be blamed on the media’s preoccupation with scandal and the willingness of public officials to exploit the media, suggested moderator Stephen Marcellino, a partner with Elser Moskowitz Eddelman & Dicker LLP.

“The media causes a lot of problems,” asserted Audrey Samers, deputy superintendent and general counsel for the New York State Insurance Department, who offered the image of “dueling agencies” racing to get press coverage. She recounted how minutes after leaving a meeting with people from the AG’s office she received a phone call from a reporter asking her to confirm that the AG had asked the department to agree to something.

“At the insurance department, we’re not used to doing market conduct exams in the press and I don’t think it’s productive,” Samers commented.

According to defense attorney Marvin Pickholz, the media is under competitive pressure to attract viewers and readers. Prosecutors use the media to help create an environment against a defendant. In the process, however, they can ruin lives.

“The pressure used to be on the government agencies to be careful before bringing charges but now there are competing regulators,” Pickholz said.

Not everyone sees the media as the culprit. “I think they’ve been pretty fair. It’s a complex subject,” Sills remarked. “There are people who have done things they shouldn’t have done. I think the disinfectant of sunlight from front pages is a good thing and it certainly wakes up some people a lot better than a memo from a CEO.”

For others, complaining that the press is unfair is a waste of time. “The media is not about fairness; it’s about what can you put in a 10 second sound bite. That’s the price you pay in our society and you have to figure out how to deal with it,” Ann Marie Marson of James River Insurance Co.

Claims effect

As senior vice president of claims at James River, Marson has to deal with the industry’s negative image on a daily basis. She and others are worried about how the industry’s low standing in the court of public opinion affects how the industry fares in courts of judges and juries.

“It makes it harder for claims to do its job,” she said. It’s harder because jurists and judges see and hear the news regarding Spitzer. This causes carriers to think twice about taking to trial certain cases where a negative industry image could make a difference. “Perception is reality and this comes to fruition in the jury box,” she said.

While claims departments might be feeling the pressure, it’s not clear that others in the industry are. Spitzer targeted broker compensation including contingent commissions, yet little has changed in the industry’s compensation practices. Most insurance companies are still paying contingent commissions and, except for the three biggest brokers that settled with Spitzer, most brokers and agents are still accepting them.

“They still very much exist beneath upper tiers of brokers and name brand P&C companies are still paying them,” Sills said.

Disclosure efforts

The insurance department’s Samers, who has been active in the investigations, acknowledged that little has changed in the compensation arena. There still is no law or regulation against contingent commissions in New York. Neither Spitzer nor the insurance department has pressed for a statutory prohibition; instead they have called for improved disclosure of compensation by agents and brokers. The department is still drawing up disclosure rules for agents and brokers.

Personally, Samers said she would like to see the percentage an agent or broker receives for commissions stamped on every declarations page. That’s her opinion and not a department position; the department’s official position won’t be known until its regulations are finished.

As Samers and others stressed, contingencies per se are not the problem; instead the problem is the questionable activities they spawn, such as bid rigging and account steering.

When an audience member questioned why brokers should reveal their income since furniture, car or clothing salespeople do not, Samers shot back. “I have heard that so many times. It is such a disservice to the industry,” she charged. Insurance brokers build relationships and have the policyholders’ best interests at heart, she said. “You guys sell trust and integrity,” she told the other audience members, who applauded her comments.

Pickholz explained that regulators are concerned with not whether but why a broker got a contingent commission. “Did it make him select a company he wouldn’t otherwise have chosen for a client?” is the question.

According to Pickholz, the industry must develop standards governing what to tell customers in language that is understandable to those with different levels of expertise and intelligence.

Insurer responsibility

While compensation disclosure is primarily the responsibility of agents and brokers, insurers must also pay attention. Simply assuming that the disclosure policy of their broker is a good one and that it is being followed is not the wisest path for an insurer, warned Pickholz. An insurer should be able to demonstrate that it had reason to believe that the broker was adequately disclosing. “They must have some procedure. Companies can’t just cover their eyes and assume,” he advised.

At a minimum, insurers might ask their brokers for copies of their policies on disclosure, even though this could potentially open them to exposure over the adequacy of the disclosure program. An insurer would likely be protected if the policy looks acceptable on the surface and there is evidence that the broker is enforcing it. “But if it becomes obvious to the company that it’s not effective, then speak up,” Pickholz stated.

Samers agreed that in everyday dealings insurance companies might not have a way to police brokers’ disclosure practices. However, she backed Pickholz’s advice that it is best for a company to have some way to prove that it takes disclosure seriously. Regulators always “prefer a company that has some rules in place over one that has none or just looks the other way,” she explained.

Informality loss

There is one behavior that might be changing as a result of the investigations. According to Sills, there has been a loss of some of what he terms the “relaxed informality” between the large brokers and insurers in discussing submissions.

Brokers have always found it useful to informally obtain price indications from insurers and a measure of their interest on an account and they still do it.

“They are very much a time saver. It helps to know if an account is within the insurer’s appetite to even quote on a risk,” Sills offered.

But now some of that communication is strained. “Now they can’t say what they are paying or what they are looking for,” he said.

Samers, unmoved over the loss of the casual quote, questioned the value of informality, especially when contracts and policies go unwritten.

“A little more formality would be helpful in this industry,” Samers commented.

Samers indicated that as with contingent commissions, price indications are themselves not the problem; rather it is the conduct that comes after getting the quotes that can be troublesome. The price indications must be legitimate and not merely part of a bid rigging or account steering scheme.

“A company can still get an indication of price. It’s what you do with that information,” she added, stressing again the importance of disclosure to clients.

Sills took issue with the seminar’s title, “The New Ethics of Insurance.”

“There is nothing new here,” he pointed out. “Ethics that have always applied, still do today. There are new rules. Some of the things people were caught doing were not acceptable under the old ethics either.”

“I hope the industry learns a lesson and there’s not another Spitzer in five years,” Marson added.