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N.Y. plans to mandate broker pay disclosure

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NEW YORK—Regulations proposed by the New York Insurance Department that would require insurance agents and brokers to disclose to clients all compensation drew mixed reactions from the industry last week.

New York Superintendent of Insurance Eric R. Dinallo issued the proposed disclosure rule more than six months after holding joint hearings with New York Attorney General Andrew Cuomo to address the compensation system established by their predecessors in 2005 and 2006 settlements with certain brokers and insurers.

In three hearings held during a two-week period last July in New York state, authorities heard from more than 30 interested parties who expressed different views on issues such as contingent commissions, equal treatment, disclosure requirements, and the difference between agents and brokers.

Under the proposed new rule, producers must provide written notification to clients of the "nature and amount" of any compensation received in conjunction with an insurance placement, including contingent commissions, loans, vacations, prizes and gifts, among other things. The rule makes no distinction between brokers, which represent buyers, and agents, which represent insurers.

Producers also must disclose in writing any ownership stakes between the producers and insurers involved in the transaction and must make available, upon request, any quotes or other alternative insurance products the broker considered and the compensation associated with them.

The proposed rule does not apply to reinsurance placements, coverages placed with captives or those in which the purchaser has no contact with a producer, such as a wholesale transaction.

While the new rule addresses disclosure, it does not address any ban on contingent commissions, a contentious issue that was addressed at length during the hearings.

Matthew J. Gaul, special counsel with the New York Insurance Department, said that while the department did not specifically address contingents, any perceived conflicts of interest associated with the incentive payments will be addressed through required disclosure.

"This is going to arm consumers and small-business owners that go to an agent or broker for insurance with more information about the role that the broker or agent is playing in the transaction. And any conflicts of interest that may be present are at least going to be aired," he said.

Mr. Gaul, noted, however, that the proposed rule is only the first step. "We're going to see how this goes; see what the reception is in the industry and how this works for consumers."

The department's goal is to promulgate a new regulation by year end "that will bring transparency to this marketplace and then we'll see where we go from there," he said.

RIMS' reaction

The Risk & Insurance Management Society Inc., for one, said in a statement issued Friday that the proposed rule is "a step forward in ensuring complete transparency," despite falling short of banning contingent commissions and maintaining a two-tier compensation system whereby some producers do not accept contingents but many others do.

RIMS' immediate past president, Janice Ochenkowski, testified at last summer's hearings that contingent commissions and supplemental commissions create an inherent conflict of interest and should be prohibited for all brokers and independent agents that represent buyers.

At a minimum, RIMS believes that all compensation should be disclosed in writing, but noted it is not "the perfect solution," said Ms. Ochenkowski, who is managing director at Jones Lang LaSalle Inc. in Chicago.

Deborah Luthi, RIMS' director of external affairs, last week said the society "offers high praise" to the New York Insurance Department for issuing the proposed regulation.

"The relationship of trust and truth and honesty between the broker and the insurance purchaser is critical, and this regulation will help ensure those elements will be maintained," she said.

While the "proposal does fall short of just a flat-out prohibition of contingency fees...we view this as a step forward in ensuring complete transparency," said Ms. Luthi, who is director of enterprise risk management services at Matheson Inc. in Elk Grove, Calif.

Big Three in favor

The world's three largest brokers support the proposed rule.

Amid investigations that they steered business to insurers that paid the highest contingent commissions, Marsh & McLennan Cos. Inc., Aon Corp. and Willis Group Holdings Ltd. agreed in 2005 to give up millions of dollars a year in contingents and to fully disclose their compensation practices to clients.

The brokerages have since criticized the system, saying they are at a competitive disadvantage because the vast majority of the industry continues to collect contingents and are not held to the same rigorous disclosure standards.

"We fully support Superintendent Dinallo's efforts to create a level playing field," Brian Duperreault, president and CEO of New York-based MMC, said in a statement. "We look forward to continuing to work closely with the New York authorities to establish an equitable regulatory landscape that serves the interests of all clients."

In a statement, Chicago-based Aon said it also "strongly supports" the efforts, calling the draft rules "a step in the right direction."

Joe Plumeri, chairman and CEO of London-based Willis--one of the more vocal advocates for transparency and the abolishment of contingent commissions--also applauded the insurance department.

The proposed regulation "is a validation of our firmly held position, and we hope it leads to an industrywide standard that would apply to all brokers, no matter where they do business," Mr. Plumeri said in a statement.

But not everyone fully supports the regulation.

The Independent Insurance Agents & Brokers of New York Inc., for one, said it has "some major concerns" with the proposal.

"IIABNY has always maintained that agents and brokers should voluntarily disclose compensation upon client request, but is opposed to any additional burdensome requirements on agents and brokers."

The association will continue to negotiate with the New York Insurance Department and will be represented on a working group set up specifically to deal with this issue, it said.