Senate Panel To Examine Insurance Industry Business Practices
The Senate Subcommittee on Financial Management, the Budget and International Security on Tuesday will conduct a hearing to examine potential conflicts of interest among insurance brokers, as well as the effectiveness of state regulation of the insurance industry, the Wall Street Journal reports (McDonald/Fuhrmans, Wall Street Journal, 11/16).
New York Attorney General Eliot Spitzer (D) last month filed suit against property-casualty insurance broker Marsh & McLennan over practices related to the contingent commissions that the company receives from insurers for new business. According to some critics, contingent commissions -- which insurance brokers receive when they reach volume or profitability targets -- provide brokers with financial incentive to place clients with insurers that pay the largest commissions. In his lawsuit, Spitzer alleges that Marsh did not award contracts through competitive bidding as stated and fixed prices with insurers in some cases. Spitzer said that such anti-competitive practices, some of which are illegal, have contributed to insurance rate increases for employers and individuals. Spitzer said that his investigation would target "virtually every line of insurance." Health insurers Aetna, Cigna and MetLife, as well as UnumProvident, the largest U.S. disability insurer, have received subpoenas from Spitzer. California, Connecticut, Delaware, Florida, Illinois, New Jersey, Pennsylvania and other states also have begun investigations into insurers and insurance brokers (California Healthline, 10/27).
In addition, Spitzer last week filed suit against California-based insurance broker Universal Life Resources over practices related to contingent commissions (Gordon, AP/Las Vegas Sun, 11/15). ULR also faces a lawsuit filed last month by California-based law firm Lerach Coughlin Stoia Geller Rudman & Robbins (California Healthline, 10/27).
Spitzer plans to testify at the subcommittee hearing on Tuesday. He likely will "draw parallels between the insurance probe and his previous investigations of conflicts of interest in investment banking and mutual-fund trading," the Journal reports. Connecticut Attorney General Richard Blumenthal (D), who also plans to testify on Tuesday, likely will state that although his investigation into the business practices of insurance brokers remains in the early stages, he has found evidence of illegal practices from "bid-rigging to fraudulent, concealed commissions and secret payoffs" (Wall Street Journal, 11/16).
According to a written draft of his testimony, Blumenthal also likely will state that he expects to file lawsuits against "entities who have broken antitrust and other state laws." In an interview on Monday, Blumenthal said that his office is "near but not yet completely ready" to file lawsuits related to his investigation (Levick, Hartford Courant, 11/16). Blumenthal, who launched his investigation into the insurance industry in June, has focused on the business practices of health and automobile insurers (California Healthline, 10/27).
Blumenthal to date has subpoenaed 29 insurers and 14 insurance brokers for information on contingent commissions, and he likely will issue additional subpoenas in the near future. In his testimony, Blumenthal likely will present the details of a proposal that would expand regulation of insurance brokers, insurers and contingent commissions. In addition, Blumenthal likely will "lay into 'laxity' in state regulation" of the insurance industry but also "warn against federal intrusion into states' reform efforts and probes of the insurance industry," the Courant reports. "We fervently hope for cooperation and will fiercely fight pre-emption," Blumenthal said (Hartford Courant, 11/16).
Ernst Csiszar, president and CEO of the Property Casualty Insurers Association of America, also plans to testify on Tuesday, and he "may urge a softer touch" on insurance industry reforms, the Journal reports. Csiszar likely will ask lawmakers not to implement "blanket prohibitions on incentive compensation programs."
The Senate subcommittee hearing also likely will address insurance industry regulation, which currently is the responsibility of states. National insurers "[f]or years" have "argued for federal oversight of the industry, which would be less burdensome than complying with each state's insurance rules," according to the Journal. Others scheduled to testify at the hearing include California Insurance Commissioner John Garamendi (D), J. Robert Hunter of the Consumer Federation of America and New York Superintendent of Insurance Gregory Serio (Wall Street Journal, 11/16).