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NEW YORKNew York Attorney General Eliot Spitzer took aim at the personal lines industry last week as he notified four insurers that, in accordance with their previous settlements, they no longer could pay contingent commissions on six additional lines of business including homeowners and personal automobile coverage.
The banimposed on ACE Ltd., American International Group Inc., St. Paul Travelers Cos. Inc. and Zurich American Insurance Co. Inc.is the latest in Mr. Spitzer's more than two-year-old investigation into broker compensation practices and essentially shifts the focus away from commercial lines to personal lines, which has never been a major focus of his past investigations.
That not only has industry players questioning the appropriateness of the move, but also what they see as one state attorney general being allowed to regulate broker compensation nationwide.
Independent agent groups, in particular, took exception to Mr. Spitzer's announcement and vowed to fight to preserve the right for insurers to pay agents and brokers legal incentive compensation.
Much of Mr. Spitzer's investigations and resulting settlements into broker compensation practices have centered on an alleged bid-rigging scheme orchestrated by Marsh & McLennan Cos. Inc. and several insurers involving excess casualty business, and allegations that the world's three largest brokers failed to act in the best interest of their commercial clients by steering business to insurers that paid the highest contingent commissions.
Not only did MMC, Aon Corp. and Willis Group Holdings Ltd. cease collecting contingent commissions in 2004 as a result, but ACE, AIG, St. Paul Travelers and Zurich, which were accused of colluding with MMC in the alleged bid-rigging scheme, also agreed to curtail their contingent payments in settlements reached with Mr. Spitzer and other authorities earlier this year.
The four insurers agreed to cease paying contingents on excess casualty coverage and on any line, product or segment of business if insurers that represent 65% of the gross written premiums on that lineincluding direct writerswere not paying such commissions or were to reach similar agreements.
Last week, Mr. Spitzer said his department's analysis of 2005 data provided by A.M. Best Co. Inc. showed that the 65% "tipping point" had been reached on six additional lines: homeowners multiperil, private passenger automobile physical damage, private passenger auto no-fault, private passenger auto liability, boiler and machinery, and financial guarantee.
As a result, the four insurers must cease paying contingent commissions on those lines beginning Jan. 1, 2007, Mr. Spitzer's letters state.
Connecticut Attorney General Richard Blumenthal and Illinois Attorney General Lisa Madigan also joined in the notices.
Industry observers were not surprised that homeowners and personal auto businesses hit the 65% threshold test, given the market share penetration of direct writers. Whether other commercial lines outside of boiler and machinery and financial guarantee will be hit in the future will depend on how many if any other insurers settle with Mr. Spitzer, sources note.
In general, observers have been skeptical about whether the 65% test would be met given the highly competitive nature of the commercial lines industry (BI, April 17).
And while Mr. Spitzer's latest ban does curtail contingents on boiler and machinery and financial guarantee coverage, the impact is not great, as they are small specialty lines of coverage, sources say.
Hartford, Conn.-based Hartford Steam Boiler Inspection and Insurance Co., a major writer of boiler and machinery insurance, for example, is owned by AIG and, like ACE, AIG ceased paying all contingents to brokers in 2004 in the wake of Mr. Spitzer's suit against MMC.
These developments appear not to greatly impact commercial lines, and the Council of Insurance Agents & Brokers has confirmed that surety bonds do not count in the definition of financial guarantee insurance, said Joel Wood, senior vp-government affairs for the Washington-based CIAB.
The move is expected to have a far bigger impact on the personal lines market.
Independent agency groups last week blasted Mr. Spitzer's move, saying the ban is misdirected toward personal lines business when the alleged illegal activity uncovered by his investigations occurred in commercial lines.
They also note that incentive payments such as contingent commissions remain a legal way to compensate sales forces, and the groups vowed to continue to defend the longstanding industry practice.
"The bottom line is when you think about this logically, it makes no sense," said Robert A. Rusbuldt, chief executive officer of the Alexandria, Va.-based Independent Insurance Agents & Brokers of America Inc. "It's ironic that the illegal activities that were originally uncovered involved large commercial accounts and big brokers and the first people to be hit are the independent agents at the retail level who are not and have not been accused of engaging in illegal bid rigging or false quoting, and yet they're the ones losing significant compensation."
In a statement, Len Brevik, executive vp and CEO of the Alexandria, Va.-based National Assn. of Professional Insurance Agents, said: "Eliminating all contingent compensation is patently unfair to those who never committed abuses, such as Main Street insurance agents. Main Street agents are not megabrokers. This is an example of settlement powers run amok. Our job is to make sure that this judicial madness does not become a model imposed on the entire insurance industry."
In a statement, the IIABA also said it will continue to fight to preserve the right of insurers to pay contingent commissions.
"It is interesting" that Mr. Spitzer has essentially gone after personal lines where most of the business is placed by agents that work on behalf of insurers rather than buyers, noted Ken A. Crerar, president of the CIAB.
More than that though, this "makes it very clear that we've got a single attorney general who's impacting 53 jurisdictions in a regulatory process that is not being regulated," he said.
"Our argument has been that we should not be defining compensation. We should be disclosing the relationships" between clients, insurers and brokers, Mr. Crerar said.
"The bottom line is that incentive compensation arrangements are legal, valid and a valuable way of rewarding outstanding sales performance by producers in many industries," a spokesman for the Property Casualty Insurers Assn. of America. "We support legislation that clarifies such relationships and brings more transparency to the insurance transaction, but don't believe consumers are best served by arbitrary thresholds that penalize personal lines consumers and insurers who were not involved with Mr. Spitzer's investigations."
A spokeswoman for St. Paul Travelers said the insurer is complying with the settlement. "We remain committed to providing our agents with an attractive overall compensation opportunity and we will continue to offer a competitive compensation program," she added.
In a statement, Schaumburg, Ill.-based Zurich said it is reviewing the notice "and will take appropriate responsive action consistent with the terms of its agreement."
A spokesman for AIG said the insurer "is complying with the terms of the settlement."
A spokesman for ACE declined comment.
Calls into Mr. Spitzer's office were not returned.