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The Spitzer Inquiries
AASCIF
Policyholder Services & Law Committee Conference
October 3-4, 2005
Kiawah Island, South Carolina
Presented by: Curtis Larsen, Montana State FundPresented by: Curtis Larsen, Montana State Fund Cora Butler, Missouri Employers’ MutualCora Butler, Missouri Employers’ Mutual Stephen Marks, Kentucky Employers’ MutualStephen Marks, Kentucky Employers’ Mutual
TOPICS
Distribution Methods Compensation MethodsSpitzer’s Inquiry and ResultsOther Inquiries and ResultsIndustry ResponsesLegislative Responses
INSURANCE DISTRIBUTION AND COMPENSATION
METHODS
Presented by: Steve Marks, Kentucky Employers’ Mutual Insurance Company
INSURANCE DISTRIBUTION METHODS
Independent Agency System
Independent contractors free to represent multiple insurance companies Independent Agent
• Represent multiple unrelated insurance companies. The agent decides which company to recommend for a specific client
• Agent of the insurance companies
• Own the expirations and can switch business among insurers they represent
• Compensated by insurance companies
INSURANCE DISTRIBUTION METHODS
Managing General Agents (MGA’s)
Wholesale insurance intermediary that stands between the insurer and agents who sell directly to the consumer
Provide underwriting and administrative services on behalf of the insurer they represent
Exact duties vary depending upon the contracts with the insurers they represent
Compensated by insurance companies
INSURANCE DISTRIBUTION METHODS
Brokers Work on behalf of the insurance buyer to identify
their insurance needs and find an insurance company that will meet their needs Insurance Brokers
• Closely resemble Independent Agents, place insurance with many different companies
• Agent of the insurance buyer
• Own the expirations and can switch business among insurers
• Compensated by insurance buyer and sometimes by insurance companies
INSURANCE DISTRIBUTION METHODS
Excess and Surplus Lines Brokers
Resemble MGA’s in that they usually do business primarily with other brokers and agents and not directly with consumers
Surplus lines brokers are specially licensed by the state to place business with insurers not licensed by that state
INSURANCE DISTRIBUTION METHODS
Exclusive Agency SystemIndependent contractors restricted by contract
to represent a single insurance company or group of insurance companies under similar management
• Agent of the insurance company
• Ownership of expiration is usually retained by insurance company. Limited ownership may exist while contract is in force but agent does not have the option of selling the expiration to anyone other than the insurer
• Compensated by insurance company
INSURANCE DISTRIBUTION METHODS
Direct Writer System/Direct Response System
Sales agents are employees of the insurance companies they represent • Services offered to prospective policyholders by mass
media, internet, telephone, mail, and face-to-face contact
• Represent a single insurance company or group of insurance companies
• Ownership of expirations is retained by the insurance company
• Compensated by the insurance company
INSURANCE DISTRIBUTION METHODS
Combination Systems
Mixed system consisting of two or more distribution methods
Compensation Methods
Fixed Commission
A fixed percentage of premiums
• Agent’s primary source of compensation • Varies by company and line of business• May be different for new and renewal
business
Compensation Methods
Variable Commission
Additional commission that may be paid by the insurance company to the agent or broker based on established factors such as volume and quality of business. Variable commission is sometimes also called contingent commission, profit-sharing commission, bonus commission, or steering commission.
Compensation Methods
Types of Variable Commission
Contingent Commission/Bonus Commission
A commission that will be paid to an agent or broker contingent upon specific characteristics of their book of business with a carrier
• The most common factors used in determining are total premium volume, increase in premium volume over a set period of time, and profitability
Compensation Methods
Profit Sharing Commission A commission that will be paid to an agent or broker
contingent upon a carrier’s profitability and the profitability of the agent or broker’s book of business with a carrier
• The carrier may require a minimum premium volume before an agent or broker is eligible
Compensation Methods
Steering Commission A commission that will be paid to an agent or broker
based on an increase in the volume of business that agent or broker places with a carrier
• Retention of current policyholders and total premium volume with a carrier may be factors in determining eligibility and commission percentage
Compensation Methods
Gifts/Prizes Similar to variable commissions except items of
value are substituted in place of monetary compensation. Trips are a common form of gifts
• The most common factors used in determining are increase in premium volume over a set period of time, total premium volume, and profitability
Compensation Methods
Fees
Payment made by the insurance buyer to a broker to identify insurance needs and find an insurance company that will meet their needs
Compensation Methods
Bonuses
Similar to variable commission for those being compensated by salary
• Increase in premium volume over a set period of time and profitability may be factors in determining eligibility
Compensation Methods
Other Forms of Compensation
Forgivable or reduced interest loans
Advertising
Favorable term lease agreements
Use of hardware and software
Compensation by Distribution Methods
Independent Agency System
Fixed Commission
Variable Commission (contingent commission, bonus commission, or profit sharing commission)
Gifts
Compensation by Distribution Methods
Brokers
Fees
Variable Commission (contingent commission, bonus commission, or profit sharing commission)
Gifts
Compensation by Distribution Methods
Exclusive Agency System
Fixed Commission
Variable Commission (contingent commission, bonus commission, or profit sharing commission)
Salary
Gifts
INVESTIGATIONS AND CHARGES BY NEW YORK ATTORNEY GENERAL
Involve large brokers (not agents) with big market clout – Marsh, Aon, Willis
Brokers received fees from many sources, including customers, carriers and reinsurers
MARSH’S ARRANGEMENTS WITH CUSTOMERS AND CARRIERS
Placement Service Agreements (“PSAs”) and Market Service Agreements (“MSAs”) with carriers
Received fee from customer and commissions from carrier
Elements of contingent commission
•Growth
•Retention
•Profitability
ELEMENTS OF CHARGES
Bid-rigging – obtaining phony quotes (artificially high) from carriers to justify placements with other carriers
Steering – placing customers’ insurance coverage with preferred carriers
Tying – combining retail placements with reinsurance
Contingent Commissions – undisclosed profit or volume-related commissions or fees from carriers
Conflicts of Interest – Brokers purportedly placing their own financial interests above customers’ interests: Placing business with carrier that offered best contingent commissions
Related Party Transactions
•Brokers’ creation of and investment in off-shore carriers
•Steering business to these related companies
SUMMARY OF QUESTIONED PRACTICESPractice Pro/Con Comment
Contingent Commissions
Benefits of Practice(industry supporters)
Encourage good risk management prior to underwriting (profit-related commissions). Support long-term relationships between brokers, clients and insurers
Form of Alleged Abuse (industry critics)
Bid-rigging. Failure to seek/obtain best terms for client
Scale of Abuse(industry supporters)
The action of a few individuals within a few firms; not systemic
Scale of Alleged Abuse(industry critics)
Very widespread and influential: “these hidden payments drive the insurance business as a whole” (Spitzer Senate testimony)
Source: Conning Research & Consulting, Inc., Prospects for Agents and Brokers (2005), p.25
Practice Pro/Con Comment
Tying: making the provision of primary business to insurers conditional upon insurers’ granting reinsurance broking business to the same broking firm
Benefits of Practice(industry supporters)
Tying is not per se justified. But some insurers point out that, for particular classes of business (e.g. facultative and some quota share), the brokers’ intimate knowledge of the primary business is an asset in placing reinsurance coverage
Form of Alleged Abuse (industry critics)
Tying is itself presented as the abusive practice. The disadvantaged party would be the retail broker’s clients, whose business was “steered” to insurers willing to reward the broker with reinsurance broking business
Source: Conning Research & Consulting, Inc., Prospects for Agents and Brokers (2005), p.25
Practice Pro/Con Comment
Tying, cont. Scale of abuse (industry supporters)
Stand alone reinsurance brokers contend that tying definitely does happen and disadvantages them. They do not consider the retail brokers’ clients to be substantially disadvantaged, however.
Scale of Alleged Abuse (industry critics)
“Large retail insurance brokers also dominate the reinsurance brokerage market, and they have found numerous and creative ways” to obtain undisclosed compensation. (Spitzer Senate testimony)
Source: Conning Research & Consulting, Inc., Prospects for Agents and Brokers (2005), p.25
Practice Pro/Con Comment
Broker investments in insurance companies
Benefits of Practice (industry supporters)
Creation of new insurance capacity at times of acute capacity shortage. Marsh in particular played a major role in the creation of the Bermuda market in this way
Form of Alleged Abuse (industry critics)
Related-party transactions, under which business is steered to insurance companies in which brokers have invested, in preference to other insurers
Scale of Abuse (industry supporters)
Not regarded as significant. The companies offer fresh capacity for lines hard to place elsewhere. Unlikely therefore that broker favoritism disadvantaged clients
Scale of Alleged Abuse (industry critics)
Not specified but “huge transfer of insurance capital and underwriting activity” offshore is cited, and brokers are said to either own in part or operate “many of these offshore entities.” (Spitzer Senate testimony)
Source: Conning Research & Consulting, Inc., Prospects for Agents and Brokers (2005), p.25
Insured Primary Insurer
Primary Broker Reinsurance Broker
Reinsurer
1
2 3 4
1 Contingent commissions paid by insurer
2 Reinsurance brokerage obtained through “tying” of direct and reinsurance business
3 Contingent commissions paid by reinsurer
4 Return on broker’s ownership stake in reinsurerPremiums
Commissions
Potential Undisclosed Broker Income Streams Identified by Eliot Spitzer
Conning Research & Consulting, Inc., Prospects for Agents and Brokers (2005), p.16
SPITZER’S RESULTSMarsh
Agreed to refunds of $850 million
Gave up contingent commissions ($800 million/year)
Criminal charges and guilty pleas - both Marsh and carrier employees who engaged in bid-rigging
Management Changes
Aon
Agreed to refunds of $190 million
Willis
Agreed to give up contingent commissions
Agreed to refunds of $51 million
Others – e.g., Gallagher: $27 million – Ill. AG; Hilb, Royal & Hobbs Co.: $30 million – Conn. AG
ONGOING INVESTIGATIONS AND ACTIONS
Criminal charges pending against broker and carrier employees
At least 16 guilty pleas from broker and carrier employees
Eight former Marsh execs indicted by Spitzer in September
NAIC’s multi-state regulatory agreement with Marsh
OTHER STATE INVESTIGATIONS
•CaliforniaAG Investigations
Commissioner Garamendi v. Universal Life Resources
•ConnecticutSubpoena to at least 42 carriers and brokers
Spitzer-style lawsuit by AG against Marsh
•Other States’ InvestigationsAlabama, D.C., Florida, Georgia, Illinois, Massachusetts, Minnesota, New Jersey, North Carolina, Ohio and Oregon
•Letters of Inquiry to Carriers and Brokers
PRIVATE LITIGATION
•CaliforniaIn Re Insurance Broker Commission Litigation
Alleging contingent commissions illegal
RICO lawsuit
•FloridaSmall business lawsuit against 20 insurers
•MassachusettsClass action a la Spitzer complaint against Marsh and insurers
•More private litigation to come(?)
DELIVERY OF INSURANCE PRODUCT (OR SERVICE)
Independent Agents•Work for several carriers
•Agent of the carrier, not the policyholder
•Actions and knowledge of Agent imputed to carrier
•Do policyholders understand that the insurance agent is agent of the carrier?
•Could agent be agent of both carrier and customer?
•Commissions paid by carrier
•Written appointment agreement with carrier (or not)
DELIVERY OF INSURANCE PRODUCT (OR SERVICE)
(Continued)• Brokers
Retained and paid by the customer (maybe)Broker is agent of the customer, not the carrierCompensation may come from both the customer
and the carrier – commission or fee.
• Producers In some states’ licensing laws, both brokers and
agents may be termed producersNAIC’s Model “Producer” Licensing Act –
comprehensive licensing scheme that blurs the line between agents and brokers
DUTIES OF AGENTS-BROKERS
Tension between servicing customer and financial interests of broker or agent
Agent may be in a conflict situation
May be agent of both under some circumstances
May owe duties to both customer and carrier
3 Couch on Insurance 3d, Chapter 45 (1997)
Deonier & Associates v. The Paul Revere Life Ins. Co., 9 P.3d 622 (Mont.2000)
DUTIES OF AGENTS-BROKERS (continued)Quote from Testimony of Gregory Serio, New York
Superintendent of Insurance to New York State Assembly Standing Committee on Insurance:
“The principle of uberrimae fidei and its translation, “of the utmost good faith,” has long been used to characterize the core duty accompanying an insurance contract. Encompassed within this duty is a basic obligation on insureds to deal with insurers openly and honestly. The industry depends on this principle to ensure that a consumer discloses all material facts about risk of loss and failure to do so, either through misrepresentation or concealment of material facts, generally renders an insurance contract voidable under New York law. Material facts are those that had they been revealed by the consumer would have either prevented the insurer from issuing a policy or prompted the insurer to issue such policy at a higher premium. This same duty of dealing fairly and honestly, with full disclosure, is also owed by the industry to its clients. Would consumers have accepted the insurance contract, at the price paid, had they been fully informed about the material facts pertaining to producer compensation arrangements that may have influenced the recommendation for placement? It is highly unlikely that a consumer would have accepted any placement where such placement was driven by any factor other than the best interests of the customer.
State statutory licensing standards: Montana, for example
•33-17-1001. Suspension, revocation, or refusal of license. (1) The commissioner may suspend, revoke, refuse to renew, or refuse to issue an insurance producer's license, adjuster license, or consultant license, may levy a civil penalty in accordance with 33-1-317, or may choose any combination of actions when an insurance producer, adjuster, consultant, or applicant for those licenses has: ….
(f) in the conduct of the affairs under the license, used fraudulent, coercive, or dishonest practices or the licensee or applicant is incompetent, untrustworthy, financially irresponsible, or a source of injury and loss to the public; (g) misrepresented the terms of an actual or proposed insurance contract or application for insurance; (h) been found guilty of an unfair trade practice or fraud prohibited by Title 33, chapter 18;
•Unfair trade practicesMisrepresentation of benefits, advantages, conditions or terms of insurance policy (MCA § 33-18-202)
Twisting – misrepresentation or incomplete comparison of terms, conditions or benefits contained in a policy
•Other legal dutiesGood faith and fair dealing
Fiduciary duties (trust relationship): a fiduciary cannot place its own interests ahead of those with whom the fiduciary holds a special relationship
Brokers or agents may have fiduciary duties. See e.g. MCA, 33-17-1102 (Producer is a fiduciary re premium)
Attempts to expand fiduciary duties are of great concern to the industry
BROKERS-AGENTS DUTIES/IMPLICATIONS FOR CARRIERS
Producer should not place business merely with carrier that provides best compensation package
Best value for customer
•Not always the lowest price
•Value of long-term relationship
How does producer show it has produced best value for customer?
OTHER AGENT COMPENSATION ISSUESNegotiating commissions
Unfair discrimination or rebating 33-18-210. Unfair discrimination and rebates prohibited -- property, casualty, and surety insurances. (1) A title, property, casualty, or surety insurer or an employee, representative, or insurance producer of an insurer may not, as an inducement to purchase insurance or after insurance has been effected, pay, allow, or give or offer to pay, allow, or give, directly or indirectly, a: (a) rebate, discount, abatement, credit, or reduction of the premium named in the insurance policy; (b) special favor or advantage in the dividends or other benefits to accrue on the policy; or (c) valuable consideration or inducement not specified in the policy, except to the extent provided for in an applicable filing with the commissioner as provided by law
(2) An insured named in a policy or an employee of the insured may not knowingly receive or accept, directly or indirectly, a: (a) rebate, discount, abatement, credit, or reduction of premium; (b) special favor or advantage; or (c) valuable consideration or inducement (3) An insurer may not make or permit unfair discrimination in the premium or rates charged for insurance, in the dividends or other benefits payable on insurance, or in any other of the terms and conditions of the insurance either between insureds or property having like insuring or risk characteristics or between insureds because of race, color, creed, religion, or national origin
MCA 33-18-210 continued
Net pricing – Rebating problem
Commission not included in premium calculations for the policy. Each producer working with a State Fund policyholder would then be required to negotiate and receive a fee or commission directly from the policyholder, or
Producers would add on their commission to State Fund net of commission quote-- commonly known as a negotiated commission price.
CONSEQUENCES FOR PARTIES TO INSURANCE CONTRACTAgents
•Greater transparency/disclosure to customers
•Decline of incentive plans
•Greater cost of doing business
•Pressure to shop around for customer
Customers
•More informed
•Perhaps higher prices
Carriers
•More churning of business (?)
•Lower costs in commissions
More regulation
THE INSURANCE INDUSTRY AND REGULATORS RESPOND
Presented by: Cora Butler, Missouri Employers Mutual Insurance Company
The Council of Insurance Agents & Brokers (CIAB)
Recommendations Made By CIAB to the President of the
National Association of Insurance Commissioners:
• Transparency and Disclosure Prior disclosure of contingent compensation arrangements
where advice is offered by producer directly to a client
• Coordination of State Inquiries Uniform and coordinated inquiries by state regulators
• Recognition of Legitimate Compensation Practices
Proper and legal method of compensating brokers for additional services provided by brokers to carrier
• Uniformity Commercial insurance is a national (and global business)
making uniformity crucial to carriers
Independent Insurance Agents&Brokers of America (IIABA)
• “I don’t think the consuming public has a problem with the way we are compensated” Thomas Grau, President of IIABA speaking at the annual conference September 2005
Incentive-based fees paid to brokers did not lead to bid-rigging and price-fixing
Allegations of kickbacks and steering of insurance contracts in return for profitable contingent commissions have proven to be isolated circumstances
IIABA (Big “I”), contd.
• Big “I” Board Adopts Policy on Insurance Company Disclosure“. . . wide range of divergent company requirements would disrupt the way in
which agents and brokers do business . . .” Robert Rusbuldt, IIABA CEO
• Recommendations For Insurer Disclosure Notifications:
Insurance policy was placed by independent insurance agent not an employee of the company
Company believes the use of independent insurance agents and brokers is an efficient and effective way to distribute its policies
Agent or broker placing the policy may receive commission for that placement
If applicable, the agent or broker may be eligible to receive additional compensation
Any questions about the nature of the compensation should be directed to the agent or broker
American Insurance Association (AIA)
Guiding Principles for Regulations/Legislation:
• Compensation Transparency Measures to provide all parties to the transaction with a clear
understanding of the total payment arrangements, enabling informed choices
Rules should not restrict insurers from compensating producers on the basis of profitable volume
• Regulatory Clarity Rules should be clear and unambiguous delineating information and delivery
mechanism Enforcement should be the exclusive province of the insurance regulator
• Jurisdictional Consistency Legal standards must be consistent and uniform across state lines
• Business Flexibility Insurance competition will benefit from more, rather than fewer, options
Federal
Department of Labor Advisory Opinion 2005 – 02A
ERISA pension and welfare plans:
• Insurers to disclose all commissions and fees paid to producers whether directly or indirectly attributable to contract
Persistency and profitability bonuses
Prizes and other forms of compensation
Must be disclosed on form 5500, schedule A (insurance information)
National Conference of Insurance Legislators (NCOIL)
Producer Compensation Disclosure Model Adopted March 2005
• Producer or any affiliate who receives compensation from customer for initial placement must, prior to the customer’s purchase of insurance:
Obtain customer’s documented acknowledgment such compensation will be received
Provide a description of the method and factors used to calculate the compensation to be received from the insurer or third party
• Section A shall not apply to: A person licensed as a producer acting only as an intermediary
between the insurer and the customer’s producer (MGA, sales manager or wholesale broker);
Placement in secondary or residual markets; or Producer whose sole compensation is derived from commissions,
salaries, and other remuneration from the insurer
National Association of Insurance Commissioners (NAIC)
Compensation Disclosure Amendment to Producer Licensing Model Act
• Established by Executive Task Force on Broker Activities
Comprised of 14 statesGoals
– Amend existing Producer Licensing Model Act– Facilitate regulatory coordination through development of
uniform “templates” for the states to use– To establish an on-line fraud reporting mechanism to
allow for anonymous reporting of “tips” of unscrupulous business practices for investigation by state insurance departments
NAIC, contd.
Compensation Disclosure Amendment to the Producer Licensing Model Act Adopted December 29, 2004
Subsection A (1)• Any insurance producer or affiliate receives compensation from the customer for the
placement of insurance or represents the customer with respect to placement, shall not accept or receive compensation from insurer or other third party unless, prior to purchase:
Customer’s documented acknowledgment of compensation obtained Amount of compensation from insurer or third party is disclosed to customer If amount unknown the specific method of calculation should be disclosed and, if
possible, a reasonable estimate of the amount
Subsection A (1) not to apply to insurance producer who• Does not receive compensation from customer for the placement; and• In connection with that placement represents an insurer has appointed the producer; and• Discloses to the customer prior to purchase that:
Producer will receive compensation from an insurer in connection with that placement; or
In connection with the placement the producer represents the insurer and that the producer may provide services to the customer for the insurer
NAIC, contd.
Subsection B“Customer” is not
• Participant or beneficiary in employee benefit plan• Covered by group or blanket insurance policy or
group annuity contract sold, solicited or negotiated by the insurance producer or affiliate
Subsection C• Section does not apply to producer who acts only
as an intermediary between insurer and customer’s producer (MGA, sales manager, or wholesale broker; or
• Reinsurance intermediary
NAIC, contd.
• NAIC considers policy renewal to be placement of insurance
Customer is evaluating options in the purchase of insurance
• NAIC does not consider modifications of existing policy to be placement
Customer is not evaluating options in the purchase of insurance
NAIC, contd.
NAIC producer documentation guidance
• Producer should be able to establish that:
The required information was conveyed to the customer on a specific date
The customer indicated consent regarding the described compensation to be received by the producer or affiliate
– Technology may be employed to document consent
Arkansas
Producer Licensing Model Act Amended to create more transparency for
consumers through better disclosure
•Applies to all producers Source of compensation for placement of insurance
Producer represents insurer and is providing service on behalf of insurer
Disclosure may be made verbally (written preferred)
Where producer compensated by affiliate or third party the source of compensation to be disclosed and the relationship explained
Source: September 2005 Property Casualty Insurers Association of America
California
• Proposed Regulation Producer (agent or broker) to disclose whether producer
will seek quote from one insurer or more than one insurer
Whether acting on behalf of the insurer or the client (accepting a fee from client is conclusively deemed to be acting on behalf of client)
Reveal amount of compensation if the client purchases insurance with any insurer recommended by producer
If compensation cannot be reasonably known at the time of disclosure, may disclose the method of calculation
Source: September 2005 Property Casualty Insurers Association of America
Connecticut
Legislation effective October 1, 2005
Producer compensation disclosure required • If compensation received directly from customer
for the initial placement of insurance, must
Obtain customer acknowledgment prior to delivery of policy to customer; and
Disclose compensation that producer will receive from the insurer or third party for the placement
• If amount not known, producer to disclose the method of calculation and, if possible, a reasonable estimate of the amount
Source: September 2005 Property Casualty Insurers Association of America
North Carolina
Department of Insurance sought changes to NC law based on NAIC Model
•Legislation introduced in the House (Broker Compensation Transparency)
Passed the House but not heard in the Senate
Anticipate additional debate next May
Source: September 2005 Property Casualty Insurers Association of America
Texas
Legislation effective September 1, 2005Amends Texas Insurance Code
• Provides that if agent receives compensation from a customer for the placement or renewal of an insurance product, other than an application fee, service fee or inspection fee, the agent may not accept or receive compensation from insurer or third party, unless prior to customer’s purchase
Agent has obtained customer’s documented acknowledgment that compensation will be received by the agent; and
Provided a description of the method and factors used to compute the compensation to be received from insurer or third party
Source: September 2005 Property Casualty Insurers Association of America
Rhode Island
Legislation effective January 1, 2006Amend the Rhode Island Producer Licensing
Act
• Where insurance producer or affiliate of producer receives compensation from the customer for the placement of insurance, neither the producer or affiliate shall accept or receive compensation from insurer or affiliate of insurer unless prior to customer’s purchase the producer has:
Obtained the customer’s documented acknowledgment that such compensation will be received by the producer or affiliate; and
Provided a description of the method and factors used to calculate the compensation
Source: September 2005 Property Casualty Insurers Association of America
Nevada
Final Regulation Adopted• Applies to brokers only
• Minimal disclosureDisclose all details of compensation and
all quotes
Source: September 2005 Property Casualty Insurers Association of America
Oregon
Final Rule Adopted• Similar to NCOIL Model
Applies to compensated producers no language with regard to representation
Source: September 2005 Property Casualty Insurers of America
New York
• Legislation Introduced (4 Bills)
Producers to avoid excessive self dealing, conflict of interest and excessive compensation
Disclose all compensation and its nature on form developed by Dept. of Ins.
Failure to disclose violation of fiduciary duty Duty to exercise reasonable care
Failure to provide best terms and what could reasonably be believed to be best quote violation of fiduciary duty
Incentive and profit sharing commission permitted if based on profit, volume, growth and retention; such arrangements to be filed annually with the state
Source: September 2005 Property Casualty Insurers of America
Living In Interesting Times
• Transparency Is Essential
Hilb Rogal & Hobbs Co. (HRH)• Most recent major brokerage settlement over compensation
practicesConnecticut Attorney General charged unlawful:
Implemented a “carrier consolidation” program designed to steer clients to select group of carriers
Moved blocks of clients to favored insurance carriers Placed clients in “producer captive” insurance carriers of which
HRH owned all or part without disclosing the ownership interest to clients
Entered into undisclosed fee arrangements whereby insurers paid undisclosed compensation to HRH for placement of business
Steered clients to favored insurance carriers to qualify for larger bonuses and contingent commissions
Paid improper premium rebates to clients in return for client retaining HRH as its broker
Provided preferred insurers with first looks on books of business that HRH wished to move to preferred carriers
Living in Interesting Times
Settlement Agreement TermsMonetary Relief
• Thirty Million to be distributed to certain brokerage clients Business Reforms
• Within 60 days of execution of Agreement HRH to undertake reforms related to insurance placements, renewal and servicing when acting as broker:
• HRH acting pursuant to written contract with client can accept
Fee Paid by Client Specified Commission to be Paid by Insurer Where allowed by law, a combination of both
• HRH to Accept No Compensation or Compensation of Any Type, Unless and Until a written Contract Signed by Each Client
Fully Discloses to the Client in Plain, Unambiguous Written Language the Commission or Other Compensation in Either Dollars or Percentage Amounts; and
The Client Consents in Writing
Living In Interesting Times
•HRH Not to Accept or Request, Directly or Indirectly Anything of Material Value From an Insurer Including, but not limited to, money, credit, loans, stock, forgiveness or principal or interest, vacations, prizes, gifts or the payment of employee salaries or expenses except as previously noted
•Contingent Compensation not allowed for brokerage
Contingent upon placing a particular number or dollar value Achieving a particular level of growth in number or dollar value Meeting a particular rate of retention on renewal business Placing or keeping sufficient business to achieve a measure of
profitability (loss ratio or other similar measure) Providing any preferential treatment in the placement process (first or last
looks, rights of first refusal, limiting number of quotes)
Living in Interesting Times
HRH acting as an Insurance Agency• Shall not directly or indirectly accept or request any Contingent
Commission, except where the following disclosure occurs (“HRH Agency Customer Bill Of Rights”):
Insurance agents, represents insurance companies and are paid by insurance companies for selling insurance to clients
Customer has the right to know all fees and commissions that will be earned on the sale of its insurance policy
Insurance company may pay additional amounts, based on factors such as the number or policies placed or renewed, the amount of premium paid or the loss histories of clients
Commissions are built into the cost of insurance Insurance agency may receive other compensation for the placement of
business from other intermediaries such as wholesalers or premium finance companies
Agency may earn interest on premiums before paying premium to the insurer
Names of insurers who competed for the business and what prices they offered or declined to make an offer (Client to request)
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