Guilty by Association

Insurance planners have enough on their plates without having to worry about whether what they're doing is legal or not. But in fact, they do have to worry about it these days, in light of a simmering threat to the entire concept of rewards to insurance agents—those rewards that often take the form of gala incentive trips to luxury resorts.

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 of insurance, and the incentives traditionally awarded to agents.

The goal: to put all incentives to insurance agents in the same category as undisclosed—and illegal—commissions paid under the table.

"Many agents feel they are inappropriately under a microscope, under siege, and that their customers now have unwarranted suspicions about their relationships," frets Robert Hartwig, chief economist with the Insurance Information Institute, an industry research organization in New York City.

Because of the recent insurance executive prosecutions, as well as the avalanche of highly publicized white-collar crime scandals, Hartwig says consumers may begin to feel that insurance agents are steering them wrong —toward certain insurance policies that have little to do with the consumers' own particular needs, and much more to do with the incentive trips the agents might win.

"But there is no evidence whatsoever that this takes place," Hartwig insists. "The market is too highly competitive for this to happen." That vigorous assertion may be just a voice crying in the wilderness if the political winds keep blowing as hard as they are now.

The charges brought by Spitzer, and other politicians in Connecticut and California, target 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, as well as an $850-million settlement this winter from Marsh & McLennan Companies, the world's largest insurance broker.

But the investigations have taken an unexpected turn. Spitzer more recently has criticized trips and fees paid to agents and indicates that his investigations are moving into personal lines of insurance. Adding to the controversy, Consumer Reports magazine has characterized the issue as a threat to individuals, noting recently, "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."

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.

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

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

Alex Soto, vice president of the Independent Insurance Agents and Brokers of America, and president of Insource Inc., a Miami-based insurance agency, also is feeling that heat. He argues fiercely that 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 asks. "Agents are paid commissions by insurance companies. Yes, those companies also give incentives for excellence in sales, but also for front-end underwriting and for appropriate client advice. If you decide that the incentive is not out of line—and I believe they are totally appropriate and used in every facet of commerce—then whether the incentive is paid on the basis of a trip or cash is immaterial."

But Soto also feels that the regulatory winds may blow in such a way that, at the very least, brokers will have to disclose to their customers where all their sources of income come from.

Soto's association is working with the National Association of Insurance Commissioners and the National Conference of Insurance Legislators to help frame possible regulations that protect agents to some degree. "It may be that the state departments of insurance will weigh in on the agent issue, and some transparency will probably be recommended," Soto says. "But we believe at the core that competition is the best corrector of the marketplace."

Insurance conference planners may have to worry about two possible contingencies. One—the more unlikely scenario—is that incentive trips will be outlawed completely as an illegal form of anti-competitive, under-the-table kickback. In that case, insurance planners' jobs will be vastly simplified; there will be no further need to plan elaborate trips to faraway resort destinations.

The second, and more realistic, possibility is that a combination of industry self-regulation and regulatory guidance will require greater disclosure to customers about incentives. Planners then will still be able to plan incentive trips, but also will be dragooned into creating training meetings to educate captive and broker agents on how to disclose those incentives to their customers.

"What people care about is when the quid pro quo of normal business begins to operate differently than they expect," says Jill Fisch, securities professor at Fordham University School of Law in New York City. "Bonuses and incentives paid to insurance agents don't usually matter to people. What would matter is if the agent were paid by an insurance company to push a particular policy. There is much ebb and flow in business. What was formerly benign is now under much more scrutiny."