T H U R S D A Y,    J A N U A R Y   6 ,   2 0 0 5 

      NAIC Adopts Producer Comp Model Law  |  NAIC Model Law: Where Do We Go From Here?  |  Spitzer’s New Year’s Resolution: Expand Investigations  |  Brace Not-for-Profit Organizations for Retirement Plan Changes  |  Big “I” Unveils 2005 Legislative Agenda   |   Big "I" National News   |

V I E W :    B R O K E R   F E E   I S S U E   U P D A T E
NAIC Adopts Producer
Comp Model Law

Last week, on a conference call of more than 175 participants, the National Association of Insurance Commissioners (NAIC) completed consideration of a first-of-its-kind producer compensation disclosure model law. The proposal, which was adopted by a vote of 31-15 (with two abstentions), is the latest response to New York Attorney General Eliot Spitzer’s suit against Marsh & McLennan Cos. and Marsh Inc. for alleged bid-rigging. The model will serve as a guide for legislatures that wish to take action, although every state is not expected to seek regulation in this area.

The heart of the proposal is paragraph (A)(1), which imposes unprecedented new disclosure and consent requirements on insurance producers who either (1) receive compensation from a customer for the placement of insurance, or (2) represent the customer with respect to a placement. Anyone covered by this provision is required, in most instances, to obtain the client’s written consent before receiving compensation from an insurer and disclose the actual amount of compensation to be received (or provide a reasonable estimate and a description of the specific method for calculating the compensation). The model also includes a safe harbor provision in (A)(2), and a producer covered by (A)(1) is not required to make the broader disclosures if he/she (1) does not receive compensation from a carrier, (2) places business with an appointed carrier, and (3) discloses that he/she is compensated by the company.

The teleconference began with a discussion of Subsection (B), a provision that would have required every agent and broker in the country to make certain disclosures as part of every insurance transaction. Although this provision was deleted from the adopted proposal, its consideration was only “deferred.” The NAIC Executive Task Force on Broker Activities was charged with reviewing this subsection and other compensation disclosure issues and reporting back to the entire NAIC within 90 days. Several of the larger states (including California, Florida and New York) pushed to ensure that this follow-up investigation will include a discussion of potentially expanding the new model to (1) require disclosure of all quotations to customers in every insurance transaction and (2) create fiduciary duties for brokers and independent agents in state law. These concepts have been promoted by California’s insurance department and others, and they would be extremely cumbersome and problematic for independent agents and brokers. IIABA will closely monitor any further actions taken by the task force and will strongly oppose any efforts to expand the model.

At the behest of the Big “I,” the regulators made a number of modest improvements to the model in the days and minutes prior to final adoption (including the deletion of Subsection (B)). Nevertheless, several concerns remain, and IIABA will seek further clarification from the NAIC and specific revisions in states where the proposal is considered. IIABA still believes a number of real-world business application issues need to be addressed. Among issues still of concern to the association are: 1) improving the distinction between brokers and insurance agents; 2) ensuring that the consent and disclosure requirements are sensible and reasonable and can be achieved by those to whom they apply; 3) clarifying that the model does not apply to renewal and residual market business; and 4) addressing several technical issues. Given the number of outstanding issues that remain, IIABA has not endorsed the new model.

A breakdown of how the states voted follows:

• States voting for the model (31): AZ, CA, CO, CT, DC, DE, GA, IA, IL, IN, KS, LA, MA, ME, MI, MO, NC, NH, NJ, NM, NY, OH, OR, PA, RI, SC, TX, UT, WA, WI and WY.

• State voting against the model (15): AK, AL, AR, FL, ID, KY, MD, NE, NV, ND, OK, PR, SD, TN and WV.

• States who abstained from voting (2): MT and VT.

For more information, contact Wes Bissett (wes.bissett@iiaba.net), Big “I” senior vice president of government affair and state relations. | T O P |
 

V I E W :    B R O K E R   F E E   I S S U E   U P D A T E
NAIC Model Law: Where Do We Go From Here?

By Wes Bissett

With NAIC’s adoption of the producer compensation model law, what will happen next? The answer is not entirely clear, but it depends on where you live.

The debate now shifts to the individual states. The NAIC’s adoption of the model does not, by itself, impose any new statutory or regulatory requirements on any agent in the country, and a state legislature or regulator must first take action for it to have effect. Some states can be expected to consider the proposal (perhaps with revisions), but policymakers in other states may not see a need to do so. It is clear that several jurisdictions, especially the larger states, will continue to press vigorously for broader, more onerous requirements on producers, and independent agents may be a target.

The Big “I” intends to work closely with state legislatures and policymakers that choose to examine the issue to ensure that the product actually enacted into law is effective for consumers and reasonable for those that must comply with its requirements. IIABA does not endorse NAIC’s model law, and we believe there are issues and provisions in the model that require further clarification and perhaps revision. Each state’s political environment on this issue is different, but IIABA is prepared to take an active role in every jurisdiction by providing substantive suggestions and recommendations for improving the current text.

Stay tuned to future issues of IN&V and IA magazine for updates as the issue unfolds.

Wes Bissett (wes.bissett@iiaba.net) is Big “I” senior vice president of state relations/state government affairs. | T O P |
 

B R O K E R   F E E   I S S U E   U P D A T E
Spitzer’s New Year’s Resolution: Expand Investigations

New York Attorney General Eliot Spitzer entered the new year resolving to continue his intense investigation of the insurance industry. After refuting reports to the contrary, Spitzer issued another subpoena and hinted that more will follow. In addition, Zenith National Insurance received letters of inquiry in California, and W.R. Berkley and Safety National Casualty Corp. announced the findings of internal investigations.

On Dec. 25, Spitzer was again in the headlines. Not for the latest turns in his investigation, but for the possibility of it ending. The New York Times article “Spitzer, in a Shift, Will Yield Inquiries to U.S. Regulators” stated: “Mr. Spitzer said he believed the era of state attorneys general crusading against misdeeds on Wall Street was ending. He said he was concerned that 50 different investigations would balkanize regulations, and added that once-lax federal agencies had become more aggressive about rooting out fraud and wrongdoing.”

However, the article was deemed inaccurate by Spitzer’s office, which issued a statement that said the NYT article “badly mischaracterizes” the attorney general’s views and that he will not hand over the reigns of his investigations to the federal government.

“In response to reporters’ questions about enforcement actions in the new year, Mr. Spitzer noted that federal authorities, specifically the (Securities Exchange Commission), have become much more active and, as a result, it would be less likely that states would have to take the lead or act alone in confronting new problems,” the statement says.

Although this is a “positive development,” it does not mean that Spitzer will halt his investigations or be “any less vigilant,” the statement articulates. It also hints that Spitzer will expand his investigation in the early weeks of January.

Perhaps following through on his hints, Washington, D.C.-based human resources firm Watson Wyatt & Co. Holdings received a subpoena from Spitzer’s office last week. According to the Washington Business Journal, the subpoena seeks “information on compensation in connection with insurance placements, including what it called override payments,” which accounted for “less than 1% of the firm’s revenues over the past four fiscal years.”

Across the country, Zenith National Insurance Corp. was also on the receiving end of a regulator’s correspondence. The workers’ comp and reinsurance underwriter received letters of inquiry Dec. 27 from the California Department of Insurance. Zenith said in a statement that the inquiries concern its arrangements with agents and brokers and whether the carrier was “involved with or aware of the activities” under investigation by Spitzer in New York. The company intends to cooperate with the inquiry and says it believes its actions are in compliance with regulations.

Companies continue to execute internal investigations as well. Greenwich, Conn.’s W.R. Berkley Corporation announced Dec. 23 that an ongoing investigation, performed by outside legal counsel, had uncovered an instance of inappropriate activity. “As a result of our investigation, a single insurance operating unit reported certain limited instances of conduct which could be characterized as involving inappropriate solicitation practices,” says a company statement. In response to this finding, the specialty insurer and reinsurer “has implemented certain additional internal procedures and is taking other corrective action.”  

Safety National Casualty Corp., a subsidiary of Delphi Financial Group, also uncovered limited instances of questionable behaviors regarding solicitations with Marsh & McLennan during an internal investigation. As a result, the company suspended the two employees responsible for Safety National’s relationship with Marsh. According to a Delphi press release, “The company believes that the senior of these employees had been involved in the practices at issue with Marsh in his former employment prior to joining Safety National in the summer of 2002.”

Delphi reported the findings of its investigation to Spitzer’s office and to the Missouri Department of Insurance.

Jennifer Sikorski (jennifer.sikorski@iiaba.net) is IA’s associate editor. | T O P |

L & H   T R E N D S
Brace Not-for-Profit Organizations
for Retirement Plan Changes

The new year is upon us and, as is customary this time of year, resolution abound. Many people resolve to better their mind, body and soul by eating nutritiously, beginning an exercise program or reading more. The time also is ripe to better your professional side. If one of your goals is to more proactively discuss issues of importance with your customers, there is a perfect opportunity coming your way. If you currently provide retirement assistance to not-for-profit organizations, it’s imperative that you inform them about the long-awaited IRS regulations for not-for-profit retirement savings plans, which are governed by Internal Revenue Code Section 403(b).

For more than 40 years, not-for-profit organizations have had different requirements for their retirement savings plans. For the most part, they afforded organizations more flexibility about who the plans covered, and the IRS was more forgiving with regard to the organizations making good faith efforts to follow the rules. However, with enactment of the new rules — effective for taxable years beginning after Dec. 31, 2005 — non-profit organizations it will be expected to follow the rules.

The new rules require a written document that contains all the material provisions of the plan. This was not required in the past. More importantly, the nondiscrimination rules (i.e. who is covered by the plan) are now basically the same as the rules that govern for-profit retirement plans.

Of special note is that that the “controlled group rules” apply to tax-exempt organizations. Many non-profits own other companies (i.e. a hospital that owns a separate lab testing facility), and the rules state that two or more organizations form a controlled group if 80% or more of the directors or trustees are the same or if 80% of the directors or trustees of one organizations are controlled by another organization. These rules do not apply to church or government organizations.

Agents need to make these organizations aware of the new rules as it will require a review of the entire organization’s structure, a thorough review of the different groups of employees, and comparisons of the provided benefits to ensure that all of the plans pass the nondiscrimination rules. Hospital may have several classes of employees, different corporations and retirement plans. They will need time to absorb of these considerations and to develop recommendations that will ensure compliance with the new rules.

Be sure to follow through on your New Year’s resolutions to your clients, and your agency and customers will benefit.

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and life-health contributing editor for IA magazine. | T O P |

O N   T H E   H I L L
Big “I” Unveils 2005 Legislative Agenda

With the start of a new Congress and state legislative sessions, the Big “I” unveiled a 2005 legislative agenda that includes broker-fee disclosure, regulatory and legal reforms, the Terrorism Risk Insurance Act (TRIA) and tax reform, among others.

On broker fees, the association will work closely with state legislatures and Congress in any review of broker compensation and will continue its call for broker disclosure of meaningful information concerning incentive fees while supporting legitimate incentive compensation arrangements.

“There must be a balance between appropriate disclosures by brokers and the protection of legal incentive compensation,” says Big “I” CEO Robert A. Rusbuldt. “We applaud the actions that are being taken to root out alleged illegal activities, and we seek responsible reforms that will halt and punish bad actors and disclose relevant information to consumers—while preserving legitimate forms of incentive compensation.”

On the issue of regulatory reform, the Big “I” will continue to strongly support the State Modernization and Regulatory Transparency (SMART) Act discussion draft, the result of the joint efforts of House Financial Services Committee Chairman Mike Oxley (R-Ohio) and Subcommittee Chairman Richard Baker (R-La.).

“The Big ‘I’ and its 300,000 agents and employees across America strongly support preserving and reforming the state-based regulatory system, which will better serve consumers without creating a cumbersome federal bureaucracy,” says Charles E. Symington Jr., Big “I” senior vice president of federal government affairs. “We support the SMART Act and its approach of targeted, common-sense reform that preserves the strong points of the existing system while making improvements in areas where they are necessary.”

Additionally, the Big “I” will continue to work with its industry partners for the renewal of the Terrorism Risk Insurance Act (TRIA), providing a federal backstop to help cover uninsurable catastrophic losses in the event of a major terrorist attack on American soil.

“Renewal of TRIA is crucial to the ability of our industry to cover catastrophic losses related to terrorism and also to preserving confidence in the marketplace,” Symington says. “Existing TRIA legislation expires at the end of this year, and it is crucial that we get this act renewed as quickly as possible.”

On tax reform, the Big “I” continues to support changes in the tax code to allow a quicker depreciation schedule for intangible assets, such as customer lists and the write-off of the first $5 million of intangible assets acquired in the purchase of another agency, with ratable depreciation over 14 years. It also supports President Bush’s call to make individual tax rate reductions permanent, which would benefit independent agencies (“S” corporations) that pay taxes at personal rates, as well as the elimination of estate taxes. The Big “I” also opposes an increase in Social Security payroll taxes or the elimination of the wage cap, which would prove very onerous for small business owners.

On legal reform, independent agents and brokers will continue their push for much needed reforms to the current litigation system for claims related to asbestos exposure, medical malpractice cases and class-action lawsuits.

Cliston Brown (cliston.brown@iiaba.net) is Big “I” director of public affairs/media relations. | T O P |