State Officials Call for Federal Investigation of Insurance Industry in Senate Hearing Testimony
The federal government should launch an investigation into the insurance industry to help end illegal business practices by insurance brokers and insurers, New York Attorney General Eliot Spitzer (D) said on Tuesday at a Senate Subcommittee on Financial Management, the Budget and International Security hearing, the New York Times reports (Treaster, New York Times, 11/17).
The subcommittee called the hearing to examine potential conflicts of interest among insurance brokers and the effectiveness of state regulation of the insurance industry in response to a series of investigations conducted by state regulators that have targeted insurance brokers and insurers, such as Aetna, Cigna and MetLife, as well as UnumProvident, the largest U.S. disability insurer. New York, California, Connecticut, Delaware, Florida, Illinois, New Jersey and Pennsylvania have launched such investigations.
As part of the New York investigation, Spitzer 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 (California Healthline, 11/15).
State officials at the hearing said that the problems their investigations have found "could be more widespread than originally thought," and Spitzer said that the "broad scope of the problems" could require a federal investigation (Remez, Hartford Courant, 11/17).
For example, he said that state regulators do not have the authority to investigate insurance industry operations in Bermuda and the Cayman Islands and that the federal government could ensure that violators of laws are held accountable (Mulligan, Los Angeles Times, 11/17). "There is, I would suggest, a Pandora's box that should be opened so we can see what is going on in these offshore ventures," Spitzer said (Hartford Courant, 11/17).
He also announced at the hearing that two senior underwriters at Zurich American on Tuesday pleaded guilty to misdemeanors related to the lawsuit against Marsh, which increased the total number of guilty pleas in the case to five, USA Today reports (Valdmanis, USA Today, 11/17).
Meanwhile, California Insurance Commissioner John Garamendi (D), who also testified at the hearing, said that he plans to file a number of lawsuits against the insurance industry in coordination with Spitzer (Los Angeles Times, 11/17).
Insurance industry representatives at the hearing defended the practice of contingent commissions and said that "no conflict rose as long as the payments were disclosed to clients," the New York Times reports (New York Times, 11/17). The representatives also said that they are unaware of insurers "routinely offering stock or loans as incentives" in place of contingent commissions, the Washington Post reports.
Ken Crerar, president of the Council of Insurance Agents & Brokers, said, "We categorically challenge assertions that fraud, bid rigging and kickbacks are commonplace in the insurance brokerage industry" (Day, Washington Post, 11/17).
Ernst Csiszar, president and CEO of the Property Casualty Insurers Association of America, said, "Consumers' best interest will be met by ensuring that they have maximum information, not by taking away agents' and brokers' incentives to serve them" (Hartford Courant, 11/17).
Albert Counselman, a spokesperson for the CIAB, added, "While isolated bad actors created a corrupt scheme to limit real choices for some customers ... contingent commissions are legal and proper methods of compensation that have been used throughout the industry for decades" (Wilkie, Copley News/San Diego Union-Tribune, 11/17).
Several insurance industry executives also said they support legislation to establish federal regulations for the industry (Barrett, AP/Houston Chronicle, 11/16).
Spitzer said, "It is clear that the federal government's hands-off policy with regard to insurance, combined with uneven state regulation, has not entirely worked." He added, "There are too many gaps in regulation across the 50 states, and many state regulators have not been sufficiently aggressive in terms of supervising the industry" (Hartford Courant, 11/17). "At a minimum, federal involvement may be necessary to assure some basic standards of accountability on the part of insurance professionals," Spitzer said (New York Times, 11/17).
Spitzer and Connecticut Attorney General Richard Blumenthal (D) said that lawmakers should consider legislation to repeal an antitrust exemption that the insurance industry received under the 1945 McCarran-Ferguson Act, which also provided states with regulatory authority over the industry. However, Blumenthal warned that states "would fiercely fight any pre-emption" of their authority over the insurance industry by the federal government and called on states to increase regulation and enforcement over the industry (Los Angeles Times, 11/17).
Subcommittee Chair Peter Fitzgerald (R-Ill.) said that lawmakers might have to pass legislation to ensure that contingent commissions and bonuses are disclosed to clients. Lawmakers also might have to clarify that insurance brokers are subject to federal antitrust law, he said (Washington Post, 11/17).
Sen. Richard Shelby (R-Ala.), chair of the Senate Committee on Banking, Housing and Urban Affairs, said that he plans to hold hearings early next year to examine the issue (New York Times, 11/17).
CBS' "Evening News" on Tuesday reported on the hearings. The segment includes comments from Fernando Grillo from the Illinois Department of Financial and Professional Regulation, Garamendi and Spitzer (Mason, "Evening News," CBS, 11/16). The complete segment is available online in RealPlayer.
In addition, NPR's "Morning Edition" on Wednesday reported on the hearings. The segment includes comments from Fitzgerald and Spitzer (Zarolli, "Morning Edition," NPR, 11/17). The complete segment is available online in RealPlayer.