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Despite
charging that too many state insurance regulators have become "industry
captives," Connecticut Attorney General Richard Blumenthal is rejecting
calls for federal intervention in the regulation of insurance and
instead urging more aggressive state action against improper activities
by insurance brokers and companies.
Drawing upon his own agency's expanding investigations and what he
termed the "historic leadership" of New York Attorney General Eliot
Spitzer in the investigation of industry practices, Blumenthal has
developed his own prescription for reform of state insurance laws and
regulations to better police the industry.
Blumenthal was among those scheduled to speak before the Senate
Governmental Affairs Subcommittee on Financial Management, the Budget,
and International Security, which is opening hearings into insurance
brokerage practices and the adequacy of the current insurance regulatory
system.
In his testimony submitted to the Senate panel today, Blumenthal warns
that the "scale and magnitude of corrupt practices" continue to mount
and that "much more remains to be done."
He said his investigators have uncovered evidence of illegal and
improper anti-consumer conduct, "ranging from bid-rigging to fraudulent,
concealed commissions and secret payoffs to flagrant conflicts of
interest -- all stifling competition and inflating insurance costs to
consumers."
He promises that state prosecutors will pursue the cases aggressively
even as insurers and brokers adopt changes voluntarily, and they will
block federal efforts to intervene. "This state enforcement and reform
effort cannot be derailed or delayed by federal intervention and
intrusion. We have a right and responsibility to enforce state antitrust
laws. We will seek strong sanctions and scrutiny. I say with great
respect to the United States Congress, and particularly to the
distinguished members of this panel: we fervently hope for cooperation
and will fiercely fight preemption."
He urges all states to be just as aggressive, warning that state "laxity
and inaction" will invite federal intervention. "State insurance
commissioners must heed the call for reform and act quickly to restore
consumer confidence. Too many have been industry captives. Some
insurance commissioners have aggressively responded to the crisis, but
many have not. State insurance regulators may redeem credibility and
restore public trust only if they join the fight for reform."
"Federalizing this problem is unnecessary and unwise," according to
Blumenthal.
"Rather than rely on federal regulation, state insurance laws should be
reinvigorated and reinvented-- made robust and real agents of reform."
He will testify that states should establish "an unequivocal, explicit
fiduciary duty between the insurance broker and the consumer, require
clear and conspicuous disclosure of fees and duties owed to consumers,
enable consumers to pay for broker advice that is truly independent of
insurance company compensation, and mandate transparent bid systems
according consumers informed choices free from insurance company
influence."
While commending California Insurance Commissioner John Garamendi for
his proposed regulation establishing an explicit insurance broker duty
to disclose all information concerning insurance company payments and to
prohibit brokers from favoring their interests over consumers,
Blumenthal believes it does not go far enough. He is recommending that
Connecticut insurance laws be strengthened to:
Establish a code of professional responsibility for insurance agents and
brokers, including a broker fiduciary duty to consumers, with clear
disclosure of that duty prior to any transaction;
Require insurance agents to clearly and conspicuously acknowledge that
an agent is acting on behalf of the insurer, not the consumer, and that
the agent is paid by the insurer based on sales of the insurer's product
to the consumer;
Require insurance brokers paid solely by insurers to reveal details
regarding such compensation;
Provide consumers with the choice of paying a broker directly for the
broker's services -- and, if the consumer makes such choice, prohibit
the broker from receiving any compensation from the insurer in
connection with that business;
Mandate that both brokers and agents disclose all insurance quotes to
the consumer and record in writing the reasons why a particular insurer
is being recommended and the nature of any insurer compensation, e.g.
straight line fee or a fee contingent on amount of business booked.
Blumenthal's office has been heavily involved in the industry probes. He
has sent 135 letters of inquiry to industry companies and brokers, in
cooperation with Insurance Commissioner Susan Cogswell.
Since mid-October 2004, the attorney general has issued a series of
antitrust subpoenas to 29 insurers and 14 insurance brokers seeking
information concerning contingent commission agreements, placement
service agreements, bonus or incentive agreements and arrangements and
related business practices between insurers and insurance brokers. He
said more subpoenas would follow in light of evidence indicating illegal
and unethical practices concerning a broad range of insurance products.
According to Blumenthal, the initial information reviewed by his staff
reveals business practices at the national large broker level that are
"riddled with ethical conflicts and the potential for serious abuse" and
that suspect arrangements go beyond those thus far publicized.
"Incentive payments, contingent commissions, placement service
agreements, overrides, and outright payoffs appear to be common industry
practice, enabling and even encouraging improper and illegal activity,"
he maintains.
He cited the example of one insurer that paid a broker a six-figure
bonus even though the broker failed to meet the sales goal. Blumenthal
says this "six-figure payment seems simply to be a bribe intended to
steer future business to that insurer."
Blumenthal has also written to chief elected officials of all 169 cities
and towns in Connecticut asking for information concerning their use of
insurance brokers to purchase municipal health, worker's compensation
and local property casualty insurance
He said he is also examining state contracts with insurance brokers and
insurers to determine whether illegal conduct has directly harmed state
taxpayers.
He thinks Congress should examine whether any federal agency has used
brokers or agents to purchase insurance and whether any illegal steering
or bid rigging occurred in these federal transactions.
He maintains that he will be bringing lawsuits and that while they will
be important, so is reform of state regulation.
"Noteworthy for this subcommittee --as well as our state legislature --
is that we are enforcing and relying on antitrust and consumer
protection statutes because the state insurance laws do not adequately
prohibit such obvious conflict of interest situations," says Blumenthal.
He points out that until 2001, Connecticut issued separate licenses for
insurance brokers and agents. This distinction reflected the theory that
brokers worked for the consumer -- whether a small or large business, an
individual or a government agency -- while the insurance agent
represented insurance companies.
But in response to Congressional pressure to streamline state licensing
procedures, the National Association of Insurance Commissioners (NAIC)
created a model insurance producers act adopted by virtually all states,
including Connecticut, that eliminated the distinction between agents
and brokers and making them both "producers."
Blumenthal believes this was a mistake that needs to be corrected. He
says it was done "to facilitate the interstate growth of insurance
brokerage and agent business, often to the detriment of consumers."
He maintains that the NAIC model act contemplates brokers receiving fees
and commissions from insurers in exchange for consumer business, but it
fails to recognize the potential for conflict of interest and to require
disclosure of such fees, much less afford other protections for
consumers.
He is seeking to encourage whistleblowers from within the industry.
"Despite receiving many boxes of documents, some of our most useful
information comes from people in the industry. We welcome such
information and are determined to protect confidential sources," he
said.
Find this article at:
http://www.insurancejournal.com/news/national/2004/11/16/47755.htm |