November 16, 2004 by Canadian Underwriter
Not unexpectedly, New York Attorney General Eliot Spitzer took several serious shots at the insurance industry in his testimony Tuesday to a Senate subcommittee looking into broker compensation issues.
Spitzer told a subcommittee of the Senate Committee on Governmental Affairs that insurance has essentially become “an insiders’ club”. 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,” he told legislators.
Spitzer prompted the investigation into broker compensation last month when he filed a civil suit against broker Marsh for “steering and bid-rigging” and publicly accused the industry of systemic, fraudulent conduct. He followed that up this week with a civil suit against life broker Universal Life Resources.
Spitzer blames what he perceives as industry collusion in part on consolidation in the broker ranks. “With so much market power concentrated in two or three brokerage firms, the threat of collusion has become a reality.”
While pointing to the allegations of bid-rigging against Marsh, Spitzer was more intent on the widespread use of contingency commissions in the industry, a long-standing practice. “Although these brokers have a
fiduciary duty of loyalty to serve their clients’ best interests faithfully, we found these duties are systematically betrayed by brokers with the aid of the insurance carriers. The truth is that contingent
commissions and MSAs (market service agreements) provide little or no value or services to insurance carriers. They appear to be nothing more than payments for steering business to preferred insurance carriers.”
He also accused brokers of making agreements with carriers which funnel business into their reinsurance brokerage operations. “Essentially, brokers agree to an undisclosed quid pro quo with insurers: we’ll steer more retail business to the insurance carrier if the carrier uses our reinsurance brokerage services.”
He also accused brokers of collusion in premium setting through “rate service organizations and trade associations”.
Spitzer urged legislators to widen their investigation into other areas including the growth of offshore insurers (specifically citing Bermuda and the Cayman Islands) and the financial interest brokers might have in insurers.