Those of you interested in the benefits implications of the recent insurance probes will want to read the complaint filed by New York State Attorney General Eliot Spitzer against Universal Life Resources, Inc. (“ULR”) (The press release is here and the complaint is here.) An excerpt from the complaint:
Federal law requires certain private employers to disclose all compensation paid to brokers in connection with those employers’ purchase of group insurance for their employees. This information must be reported on Form 5500 and be filed by the employer with the United States Department of Labor. The employer may not necessarily know the specific amounts and types of compensation (i.e., commission, consulting payment, override, communication fees) the insurer has paid to the broker. As a result, the insurer usually prepares a schedule for the Form 5500 (“Schedule A”) on behalf of the employer, which reports the amount of compensation the insurer has paid to the employer’s broker. In the absence of disclosure of such compensation elsewhere, Schedule A provides an opportunity for employers and employees to learn of the total compensation the broker has received from an insurer; if payments such as overrides or communication fees are not disclosed on Schedule A, the employer and employees may not learn of their existence.
For a summary of the controversy involving ULR, see this article from Workforce: “Spitzer Opens Benefits Front.” (from Benefitslink.com)
Also, yesterday the Subcommittee on Financial Management, the Budget, and International Security, of the U.S. Senate Committee on Governmental Affairs, held a hearing entitled “Oversight Hearing on Insurance Brokerage Practices, Including Potential Conflicts of Interest and the Adequacy of the Current Regulatory Framework.”
Excerpts from Statements and Testimony at the Hearing:
Senator Peter G. Fitzgerald:
“My study of this insurance brokerage controversy convinces me that there is a federal role — the time-honored federal role that guarantees competition and fights the mischief of undue market concentration. Contingent commission arrangements have been common and legal for decades. I believe it is no coincidence that the controversy of these compensation arrangements tracks the increasing consolidation of the brokerage market — especially the market for large corporate buyers.I believe it is no coincidence that Attorney General Spitzer first sued the largest market player in insurance brokerage. And I believe it is no coincidence that when Attorney General Spitzer first investigated contingent commissions pursuant to his vast powers under New York’s Martin Act, he appears to have discovered anticompetitive — and even criminal — abuses orchestrated not by just any random insurance broker, but by an insurance broker that controlled 40% of its target market.
And I will be interested in hearing the views of the witnesses as to whether this brokerage controversy lends more, or less, support to the proposal developed by the leadership of the House Financial Services Committee — the State Modernization And Regulatory Transparency Act, or SMART Act — a draft of which has been circulated by Chairman Oxley and Capitals Markets Subcommittee Chairman Baker. The House Financial Services Committee has conducted 16 hearings on insurance reform since the Committee’s organization in January 2001, and I applaud the hard work of Chairman Oxley and Congressman Baker in this area.“
Senator Daniel K. Akaka:
“I also want to know whether the deceptive and questionable practices found in commercial property and casualty insurance are also found in other lines of insurance, such as health insurance, where premiums continue to rise. Employer-sponsored health insurance premiums increased an average of 11.2 percent in 2004 according to the Kaiser Family Foundation and Health Research and Educational Trust. For many working families, these increases have made it more difficult for them to make ends meet and to retain their health insurance coverage. If a portion of the increase in premiums for health insurance may be attributed to deceptive and opaque practices among insurance brokers, steps must be taken to make sure that families are not overpaying for their current coverage due to the questionable activities of some insurance brokers.”
Eliot Spitzer, Attorney General, Office of the New York State Attorney General:
“Not only do insurance brokers receive contingent commissions to steer business, but many brokers, with the assistance and collusion of insurance companies, engage in systematic fraud and market manipulation in order to ensure that profitable and high volume business goes to a few selected insurance companies. In other words, we found that favoritism, secrecy and conflicts rule this market, and not open competition.This struck us as a very familiar pattern. Whether in investigating conflicts of interest between the research and investment banking arms of large wall street firms or our recent work in the mutual fund industry, we have found that the lack of transparency, combined with inadequate disclosure and regulatory oversight, often leads to market fraud and collusion. Many insurance lines, from employee benefits to property and casualty, essentially function as insiders clubs, where those with market clout and power pay for preferential treatment. Similar to the small investor on wall street or in mutual funds, the ordinary purchaser of insurance has no idea that the broker he selects is receiving hidden payments from insurance companies, that the advice he receives from the broker may be compromised, or that the market bids he sees may be illusory. This has led to a crisis of accountability. . .
Last Friday, my office filed a complaint against Universal Life Resources, Inc., a key consultant and broker in the employee benefits industry. ULR advises hundreds of employers in the selection of insurance and has placed insurance for four million U.S. workers. The complaint details how ULR is retained to help employers reduce costs and procure the most appropriate benefit plans for their employees, but instead engages in massive steering of this business to a small set of insurers that have been willing to enter into side-deals with lucrative payoffs for ULR. . . It is, of course, employees who pay for these hidden costs through higher life and other group premiums. . . .
The federal government should not preempt state insurance enforcement and regulation. Nonetheless, I do believe there is a role for the federal government, especially in the areas of off-shore capitalization and investment by insurance companies. At a minimum, federal involvement may be necessary to assure some basic standards of accountability on the part of insurance professionals.“
Richard Blumenthal, Attorney General, State of Connecticut :
“State law should establish a binding, enforceable code of ethics for both insurance brokers and agents. This code should prohibit an agent or a broker from basing an insurance recommendation on potential compensation from the insurer. It should also require an agent to disclose in writing that the agent works for the insurance company rather than the consumer. Both agents and brokers should disclose to the consumer any compensation from insurers relating to the consumer’s insurance purchases.The code of ethics should impose a fiduciary duty on the broker to obtain the best deal for the consumer irrespective of broker self-interest.
Recognizing the potentially corrosive and coercive effect of either contingent or straight commissions on the insurance agent’s or broker’s recommendation to the consumer, state law should require full disclosure by the agent or broker of the various insurance options for the consumer. If the agent or broker recommends one insurance product over another, the agent or broker must articulate in writing the reasons for the recommendation. This information will guarantee the consumer is fully aware of the options and create a paper trail for regulators to ensure that the agent or broker is not making recommendations based solely on the agent’s or broker’s financial interest.“
John Garamendia, Insurance Commissioner, State of California :
“With respect to disclosure of the amount of commissions, brokers and agents will ask, “Why should we have to disclose the amount of our commissions? Most salesmen sell on commission, yet they are not required to disclose the source and amount of the compensation they receive.”The answer is, as I have said before, that buying insurance is not like buying groceries. Securities brokers and real estate brokers are required to disclose the source and amount of their commissions, and so should insurance brokers and agents.“
More on the hearing from the Kaiser Family Foundation here.