On the Issue of Agent/Broker Compensation & Contingencies
The PIA Western Alliance has always supported vigorous insurance oversight and penalties should be imposed when agents or brokers break the law. As an association we regularly school our members to make sure their practices are in compliance with the law.
We also have a responsibility to pay attention to the evolving nature of disclosure requirements. The PIA Western Alliance is not against disclosure, we just want balanced regulations that take into account the needs of consumers while not placing burdensome requirements on producers.
We applaud regulators like New York Attorney General Eliot Spitzer and California Insurance Commissioner John Garamendi for bringing companies bilking investors and customers to justice. What we would like them to note is in their passion to mete out justice to wrongdoers, they are meting out a different type of justice to small businesses and a brand of justice that could spell devastating future financial consequences for independent agents and brokers.
The push to implement new agent/broker disclosure regulations lump the small-to-mid-sized insurance agency into the same category as mega-insurance brokerage firms. They paint everyone with the same brush and essentially say all must suffer because of the wrongdoing of a few.
This outcry for change is interesting. It has become more important for regulators to “appear” to correct a problem than taking their time and making the correct correction. Instead of gathering information and thinking this through, groups such as the National Association of Insurance Commissioners hastily put together regulations that have caused more confusion than clarification.
It’s unfortunate that overzealous politicians–and the people making the biggest impact in this issue are politicians with eyes on higher office–are radically changing the face of the industry and those changes are unnecessary. Through new regulations and settlements with the world’s largest brokerage houses, politicians like Spitzer and Garamendi are pointing fingers at everyone but themselves.
Their agencies should have caught these problems earlier but didn’t. It wasn’t lack of compliance or laws that triggered the investigations–it was insider information from a disgruntled employee.
The media cites the need for new regulations, but these illegal practices were stopped with laws already on the books. Regulators had the authority to enforce those laws and did. Why do we need tough new laws if the tough old laws worked?
Will new rules prohibit others from doing the same thing in the future? Will they help insurance regulators quickly see when rules are being bent? The sad answer is no. We wish politicians would ask themselves–if the tough old laws work, why do we need new ones?
The rhetoric for new regulations is doing damage to the independent agency system. Reasons for California’s new regulations–and in states considering similar changes–seem to be based upon the presumption that the goal of every insurance agent or broker is to get their hands as deeply into a customer’s wallet as possible. Though it’s not stated, the implication is that agents and brokers are deliberately misleading consumers so they can make a greater profit.
Nothing could be farther from the truth.
Willis CEO Joseph Plumeri says “contingent commissions are inconsistent with client advocacy and unacceptable for insurers to pay and agents and brokers to accept.” Independent agents and brokers have not used contingency commissions in an illegal manner. They haven’t hidden anything from their customers. And unlike Willis, they aren’t “volunteering” to enter settlements that include substantial business reforms.
The insurance marketplace needs variety in order to properly serve the diverse needs of our customers. Different insurance operations will operate under various forms of earning/compensation structures. One way of doing business has never been successful and we don’t see how it will be in the future.
If suggestions to eliminate contingency fees are implemented, a percentage of the financial impact of the settlements because of real or alleged wrongdoing will be transferred from the large brokerage houses to the smaller independent insurance agent and broker. This is unfair. The people we represent do not operate in the mega-insurance market segment and their earnings models don’t come close to approaching that of the firms suggesting the elimination of contingency fees. To suggest that the independent insurance agent or broker give up a portion of their honest income because of this is unconscionable.
Do you see the irony in this scenario? These brokerage firms are worth billions and the loss of contingencies is a mere inconvenience. For the vast majority of independent insurance agencies the loss of contingencies could tell a very different story.
Clark Sitzes is the executive vice president of the PIA Western Alliance. The Western Alliance consists of four affiliate chapters: Oregon/Idaho, Washington/Alaska, Montana and the Group–Arizona, California, Nevada and New Mexico.