Insurance Investigations Poised To Scrutinize Agent Incentives

Incentive rewards for insurance agents — the object of year-long programs often designed or implemented by insurance meeting planners — are coming under increased scrutiny because of ethical lapses elsewhere in the industry.

The issue stems from prosecutions launched last fall by New York Attorney General Eliot Spitzer against several insurance executives and companies for unreported commissions and bid-rigging in selling commercial lines of insurance. Spitzer and others now appear ready to turn their attention to personal lines, and the incentives traditionally awarded to agents.

"Obviously this issue requires a lot of attention," said Steve Bova, executive director of the Insurance Conference Planners Association, in Chicago.

"While our people [planners] are not insurance experts," Bova said, "the issue is how attuned they are on the issues affecting their colleagues." Bova said the subject came up at a recent ICPA board meeting, and thinks it will be addressed at future ICPA meetings.

The charges brought by Spitzer targeted the practice of unreported "contingent commissions," whereby insurance companies paid broker companies under-the-table fees to send them clients. Those kickbacks, Spitzer charged, increased premium costs and inserted bias into the process.

Spitzer has gained guilty pleas for fraud and bid-rigging from several executives, and an $850 million settlement late last month from Marsh & McLennan Companies, the world's largest insurance broker. Investigations by others have resulted in lawsuits filed in California and Connecticut.

While on its face the issue of contingent commissions may seem unrelated to incentive rewards to independent agents — agents, after all, are expected to be compensated for a job well done — the industry is feeling a ripple effect:

Spitzer upped the ante in early January before a Senate committee in Washington by criticizing trips and fees paid to agents if that compensation is undisclosed.

He followed this up by revealing to a New York State Assembly insurance committee that his investigations are moving into personal lines of insurance.

Consumer Reports magazine characterized the issue as a threat to individuals, noting last month, "Consumers may also be overpaying for insurance purchased through independent insurance brokerages…. Investigators want to know whether agents receive extra commissions for steering business to a particular insurer."

Given the escalating stakes, insurance agents are becoming concerned.

"Today, many agents feel they are inappropriately under a microscope, under siege, that their customers have unwarranted suspicions about their relationships, and their motives for placing policies with a particular insurer are being questioned," said Robert Hartwig, chief economist with the Insurance Information Institute, an industry research organization in New York.

"But many people work in industries where, if they meet certain goals, they might get a trip or a bonus."

Alex Soto, vice president of the Independent Insurance Agents and Brokers of America, and president of Insource Inc., a Miami-based insurance agency, is feeling that heat. But he said incentives don't sway agents to sell inappropriate products, because competition is so fierce and the impact of incentives on the price of premiums is low.

"What does the customer care if company A is sending me to Hawaii if I can deliver better coverage for a lower premium?" Soto asked.

Still, it's apparent the political winds are shifting.

"We do think we should take a look at the issues so our clients can understand this environment a little bit better," said Chris Gaia, vice president of marketing for Maritz Inc., the St. Louis-based meetings-management company, which has a number of insurance clients.

"The insurance meeting planner needs an awareness of the issues," Gaia said. "Structures put in place under a different set of circumstances may or may not work with what is evolving."

Contact Christopher Hosford at [email protected]