BIG “I” CALLS FOR BROKER DISCLOSURE, PRESERVATION OF INCENTIVE COMPENSATION
WASHINGTON, D.C., Nov. 16—The Independent Insurance Agents & Brokers of America (the Big “I”) testified today before a Senate subcommittee in support of broker disclosure of incentive compensation arrangements, the continued use of legal, longstanding sales incentives, and the need to preserve, but reform and modernize, the state-based insurance regulatory system.
Alex Soto, CPCU, ARM, president of Miami-based InSource, Inc. and a Big “I” national officer, testified before the Subcommittee on Financial Management, the Budget and International Security of the Committee on Governmental Affairs. He expressed the Association’s strong condemnation of bid-rigging, market manipulation and other anti-competitive conduct and called for justice where alleged illegal activities have occurred.
“No system of regulation and oversight will ever prevent all determined bad actors from breaking the laws of the land, but we are extremely pleased state officials are acting aggressively and in a coordinated manner to restore the public’s trust in the insurance industry,” Soto testified. “It is our hope that all individuals who have engaged in this conduct will be punished to the fullest extent of the law.”
Soto distinguished between placement service agreements (PSAs) and contingent commissions—a crucial distinction, because PSAs compensate brokers up-front for the placement of business based on volume, whereas contingent commissions are contingent on a number of factors and paid on the back end. He emphasized that contingent commissions are a legal, legitimate form of compensation to reward excellent sales performance.
“Sales incentive programs are a legal and legitimate tool used in nearly every industry to reward performance, including those that also rely on commission payments,” Soto testified. “From refrigerators to cars, and homes to business equipment, compensation that rewards a sales force for excellence is sound business practice.
“There is nothing inherently wrong with such payments that reward performance excellence,” Soto continued. “Performance excellence is compensated in virtually every industry, sales or otherwise, whether measured by the amount or quality of business produced, administrative savings generated, speed or quality of customer service, or other criteria. Unlike some other industries, however, the existence and amount of incentive compensation paid to insurance producers is not based upon a particular insured or particular purchase of insurance, but is paid based on the overall relationship between a producer and an insurer.”
Soto told the subcommittee that contingent commissions benefit consumers as well as agents due to the greater efficiency they provide in the marketplace.
“Each party involved in the insurance transaction benefits from the use of contingent commissions,” Soto testified. “They provide an incentive to agents and brokers to engage in effective underwriting and to assist customers with risk management. These fees also facilitate the appropriate matching of certain risks with risks acceptable to particular insurance companies, which can lead to greater insurance availability. In the end, by bringing efficiency to the overall marketplace, all participants—the consumer, the insurance company and the producer—benefit.”
Soto additionally testified that the Big “I” believes the best way to guard against conflicts of interest, or the appearance of such conflicts, is through broker transparency and disclosure. He also noted that the insurance marketplace is highly competitive, and that this intense competition serves business and personal consumers well and provides a built-in defense against widespread irregularities that would not be tolerated by the marketplace.
“As an independent agent who sells both business and personal insurance, I witness the effects of this intense competition on the ground floor of the marketplace every day,” Soto said. “My current customers are approached and solicited regularly by my competitors in the area, and I also do my best to compete effectively against them to grow more business. Such competition keeps agencies responsive and accountable, and helps ensure that consumers are well-served.
“If an insurance provider ultimately offers a buyer insurance terms that are below par, prices that are inexplicably higher than others, or service that does not create a value proposition for the purchaser, that buyer will move its business to another agent or channel of distribution.”
Soto also cautioned against the misconception that federal regulation of insurance would put a stop to alleged illegal activities in the industry. He noted that it was state-level investigations that uncovered the alleged abuses, not federal-level action.
“State officials have acted aggressively to identify and punish those engaged in improper activities, and additional intensive investigations and inquiries continue today across the country,” Soto said. “The ongoing investigations at the state level show that the states are on the job and can be successful in ferreting out illegal activities. The alleged illegal conduct that has occurred has come to light as a result of the collaborative efforts of state officials. We are pleased that state law enforcement authorities have worked closely with and benefited from the insurance expertise of state regulators.”
Finally, Soto reiterated the Association’s support of targeted federal reforms to the existing regulatory system, as envisioned in the State Modernization and Regulatory Transparency (SMART) Act discussion draft unveiled by House Financial Services Committee Chairman Mike Oxley (R-Ohio) and Subcommittee Chairman Richard Baker (R-La.). The Oxley-Baker plan would institute necessary reforms without creating a new federal bureaucracy.
“Federal regulation is no panacea, and there is no reason to believe federal oversight would have caused a different result,” Soto testified. “In fact, there are numerous examples of where federal regulators, including those overseeing segments of the financial services world, have failed to adequately protect consumers. Scandals involving investment banks, mutual funds and the savings-and-loan industry all occurred within industries subject to federal regulation and, more recently, federal banking regulators have actively pursued the outright preemption of many state-enacted consumer-protection laws. This track record does not suggest that centralized federal oversight would do a better job of protecting consumers than state regulators, who possess decades of experience and insurance expertise.”
Founded in 1896, the Big “I” is the nation’s oldest and largest national association of independent insurance agents and brokers, representing a network of more than 300,000 agents, brokers and their employees nationally. Its members are businesses that offer customers a choice of policies from a variety of insurance companies. Web address: www.independentagent.com.