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T H U R S D A Y, F E B R U A R Y 3 , 2 0 0 5
Marsh, Spitzer Close Book on Investigation | Spitzer Fallout Continues | Tie-in Tipping Point? Massachusetts Bankers-Part II | Wrap Up Small Business Benefit Packages | Chief Deputy Whip Eric Cantor to Address Insiders’ Luncheon | Put it in Writing—How to Select a Producer Contract | Big "I" National News |
P R O D U C E R C O M P E N S A T I O N I S S U E U P D A T E
Marsh, Spitzer Close Book
on Investigation
After weeks of speculation that a settlement between Marsh & McLennan and New York Attorney General Eliot Spitzer was imminent, Marsh announced Monday that it had settled with Spitzer to the tune of $850 million, to be paid to clients over the course of four years.
Marsh President and CEO Michael Cherkasky apologized for the “unlawful” and “shameful” actions of “a few people” in a press teleconference. Although he acknowledged that the past few months have been “a dark period in the company’s history,” he stopped short of admitting guilt by the company. According to the terms of the settlement, Marsh did not admit or deny any of the charges Spitzer levied against it, and Marsh will not be subject to any other lawsuits filed by the state of New York based on the charges that were the subject of the settled lawsuit.
According to the settlement, Marsh will establish an $850 million fund that will go to clients, not to the state—a point Cherkasky stressed in the teleconference. Clients who placed business through Marsh between Jan. 1, 2001 and Dec. 31, 2004 will be eligible to receive a payment from the fund in exchange for agreeing to not sue the company if their insurance placements resulted in contingent commissions or overrides. Cherkasky said 100,000 entities potentially could be involved. However, the settlement affects only the New York suit filed by Spitzer and regulatory actions covered in related settlement documents, not other states' investigations for alleged unlawful acts.
Spitzer praised Marsh for its cooperation. “To its credit, Marsh is not disputing the problems identified in our original complaint,’ he said in a statement. “Instead, the company has embraced restitution and reform as a way of making a clean break from the practices that mislead and harmed its clients in the past.”
Additionally, Marsh is required by the settlement to reform some of its business operations, including no longer accepting contingent commissions from insurers and limiting its insurance brokerage compensation to a specific fee to be paid by the client, a specific percentage commission on premium to be paid by the insurer upon purchase, renewal, placement or servicing the insurance policy, or both, provided there is full disclosure of all commissions to clients and written consent by them. Cherkasky said he believes Marsh is a better company today than it was Oct. 13, the day before Spitzer filed suit against it. “We believe we are ... more transparent, conflict-free, compliant and efficient,” he said.
What does this mean for the industry? Cherkasky believes that Marsh’s new business operations “will serve as a template” for other brokers. “We urge everyone to give up market-services agreements and compete with us on an open basis,” he said. “Marsh is confident that on an apples-to-apples basis with complete transparency we, in fact, will win more business.”
Spitzer echoed Cherkasky, saying, “These landmark reforms will help protect against conflicts of interest and help restore the integrity of the entire insurance industry, if followed by other firms.” He also noted in the statement that Marsh’s reforms go beyond the National Association of Insurance Commissioners’ recently adopted producer compensation disclosure model law.
Speaking later in the day at a National Press Club luncheon in Washington, D.C., Spitzer issued more fighting words toward the industry. According to a Knight Ridder/Tribute report, Spitzer told his audience: “The insurance industry has corruption that is rife throughout it. Rife. It touches every line of insurance that is purchased, every line. And we will keep going until we find it.”
Following the settlement announcement Monday, Marsh shares rose 4.5% to $32.50.
Additionally, Fitch Ratings affirmed and removed Marsh from negative watch, although the rating outlook remains negative. In a statement, Fitch states said that although the $850 million settlement costs will affect Marsh, the settlement “eliminates incredible uncertainty.” However, the negative rating outlook concerns the possible long-term affects on Marsh’s operating model and profitability.
Standard & Poor’s took a different stance, keeping Marsh on credit watch negative “because of continuing concerns about potential regulatory and civil actions and the potential ramifications thereof,” S&P credit analyst Steven Ader said in a statement.
Jennifer Sikorski (jennifer.sikorski@iiaba.net) is IA magazine’s associate editor. | T O P |
P R O D U C E R C O M P E N S A T I O N I S S U E U P D A T E
Spitzer Fallout Continues
Industry Addresses Business Climate, Scathing CFA Report
The fallout from the Spitzer investigation continues to reverberate nationwide this week as the industry addressed the state of the market and reacted to a report released by the Consumer Federation of America (CFA).
UnumProvident Corp. is mulling over changes to the way it compensates brokers. Joe Foley, a senior vice president, told the Chattanooga Times Free Press that UnumProvident advocates complete and timely disclosure and that “in the next two to three weeks, we’ll begin to communicate more to our producers and sales folks and the board any recommendations we have.”
In other news, the CFA issued a scathing study last week alleging that insurance agents steer consumers to favored companies. CFA Insurance Director J. Robert Hunter levies several accusations against the industry in the study. Among his recommendations to consumers is to be cautious when dealing with insurance companies that pay contingent commissions and with independent insurance agents that receive them, saying these agents “work for insurance companies, not consumers.” The Big “I,” along with other trade organizations, immediately denounced the report as misleading and without grounds for support.
Among its complaints, the Big “I” said in a statement, “The report makes unsupported and misleading statements about the way independent insurance agents and brokers work, resulting in irresponsible and incomplete advice to consumers. It incorrectly correlates incentive compensation, which is used in nearly every sales industry in the country to reward sales performance, with unsubstantiated and baseless claims that independent agents or brokers may be induced by it to delay filing consumer claims or otherwise not provide the best service to customers.”
“The study is a tremendous injustice to independent insurance agents and brokers all across America and the honest, professional service they provide to consumers,” Big “I” CEO Robert A. Rusbuldt says. “This report is long on speculation and short on facts, and simply does not reflect the realities of the marketplace.” (See Association Newsfor more.)
The Property Casualty Insurers of America and the American Insurance Association also expressed their disapproval. The PCI noted that “the CFA ‘study’ is based on annual financial statements that insurers file with the NAIC. These financial statements only verify that some insurers pay contingent commissions to their sales forces. The CFA makes a quantum—not to mention an irresponsible and absolutely unsubstantiated—leap to conclude that the payment of a contingent commission results in the ‘steering’ of business by agents to costlier insurance providers. The fact of the matter is that the CFA conducted no research on buying habits or sales practices to back up its ridiculous allegations.” AIA called the study “absurd” and “wholly without merit.”
Katie Butler (katie.butler@iiaba.net) is IA magazine’s editor in chief. | T O P |
 V I E W : P & C T R E N D S
Tie-in Tipping Point? Massachusetts Bankers-Part II
Will the recent victory by the Massachusetts Bankers Association allowing banks more freedom over insurance sales be the tipping point to broader bank entry? Probably not is my estimation, and here’s why:
First, as I noted in last week’s IN&V article “Massachusetts Bankers Win One for the Feds,” the Big “I” federal lobbying and Office of General Counsel legal team are watching over this case. They, together with our volunteer leaders, would quickly come to consensus on a plan of action if circumstances developed to give banks an unfair advantage in the marketplace. While many members of the Big “I’ have become affiliated with banks via acquisitions and joint ventures, I dare say none them expects an unfair advantage be bestowed on them that takes advantage of prominence gained through tax-payer backed federal guarantee of deposit insurance.
Second, the decision was rendered at the district court level. That is, this case was decided at the first rung of the federal court system which is one of 90+ such federal courts that exist in the states. The decision’s dominion then is limited. It would have to gain some momentum through, for example, similar decisions in other districts or potentially conflicting decisions that then would need to be upheld in the bank’s favor in the United States Courts of Appeal.
Third, and perhaps the most telling to me, is based on history, and that tells me there has been a lack of success. To be sure there are some notable victories—in fact some of the agencies now listed in the top 10 nationally are owned by banks—but in general the banks know the history is pockmarked. In 1991, I did a banks-in-insurance study for the Independent Bankers Association of America (known today as the Independent Community Bankers of America). In that study, 64% of banks said their insurance operations were only “moderately successful” or outright “unsuccessful.” Considering a very credible 1,988 banks responded to the survey, I believe it’s fair to say the majority of bankers would be aware of the uneven track record of insurance in banks.
Fourth, why would a banker risk a stable and profitable business for a less stable and less profitable one? Bank returns are nearly twice as high and less than half as volatile than property-casualty insurers (see in “In the Stockades of the Public Stare” in the Dec. 12 IN&V.) When you consider the intermediary role of agent/broker, bank boards have to ask themselves why they would encourage bank managers to use scarce resources to pursue insurance when a disputed claim or other problem might result in the loss of the more profitable banking relationship.
Lastly, I would expect that banks will not do a great deal more with insurance sales until they land on a strategy that they are comfortable with as an industry. With the passage of the Gramm-Leach-Bliley Act of 1999, banks finally received not only expanded agency authorities but also expanded underwriting capabilities. Since then we have watched the nation’s then-largest bank, Citicorp, nurture some start-up underwriting operations to suddenly become Citigroup-Travelers—only to now turn back to its roots as Citigroup. Only one bank? Yes, but very likely a bellwether.
In 1991, about 25% of the banks insurance agencies affiliated with them, with concentrations in the upper Midwest states. I suspect that number is about the same today. The banks-in-insurance movement bears watching but I do not think we are at any sort of tipping point.
Paul Buse (paul.buse@iiaba.net) is a licensed agent and president of Big “I” Advantage, IIABA’s for-profit subsidiary. | T O P |
L & H T R E N D S
Wrap Up Small Business Benefit Packages
Over the past two decades there has been a transformation in the U.S. economy. Small, not large, companies are creating jobs. Mergers are the trend among larger companies, and the first thing that generally happens is a significant reduction in staff to lower operating costs in order to service a larger debt load for the combined companies. As a result of such downsizing, larger companies outsource many services, creating opportunities for nimble, smaller companies. This is especially true for the largest employer in United States, the federal government. Have you noticed that the person hauling or delivering your mail may or may not be a federal employee? Increasingly, these services are outsourced to private companies.
The result is a proliferation of smaller-sized businesses providing services that larger companies do not view as a strategic advantage to provide in-house. As the businesses grow, one of the largest obstacles they contend with when competing for competent employees is the issue of employee benefits. Many employee benefits involved insurance and transferring risk, and basic insurance concepts hold that the larger the group of similar risks, the more predictable the risks become to price, minimizing the concern of adverse selection among the insureds. Also, administrative costs can be spread over a larger group, reducing the insurer’s cost of the account.
As a result, smaller businesses, which typically operate lower-margin businesses (except for Professional Corporations), have significant challenges in providing a competitive benefits package. According to the 2004 Kaiser Family Foundation/Health Research and Educational Trust Survey, of companies with three to nine employees, only half provide health insurance benefits to employees. Yet, of companies with 50 to 199 employees, more than 90% offer health insurance benefits to employees.
This presents a looming opportunity for independent agents to attract new business by helping these companies reach their objectives. First, let’s assume the smaller company has a very finite budget for employee benefits. Second, just by offering coverage in its company (most groups are defined as two-plus employees), it can access better coverage than the employee purchasing it on his own. Third, by offering a flexible savings account, Premium Only Plan (POP), it allows the employee to pay for coverage on a before-tax basis (federal, state and FICA), which can lower the cost from 20% to 48% instead of paying for it with after-tax dollars. Even if an employer cannot contribute much to the cost, taking these two steps can be a big help to an employee needing coverage.
Depending on what your particular state allows with regard to pricing, some small groups can have a pricing problem if someone in the group has a serious medical condition. However, many states cap the maximum cost that can be charged, and some HMOs have a single community rate for all of their small group business. The new HSAs (high deductible medical insurance plans coupled with a before-tax savings account) also can help lower the cost of coverage to make it affordable.
Even if your agency doesn’t offer health insurance to its customers, find a reputable individual in your area to refer your customers to, and they’ll respect your relationship with the company. Solving a customer’s needs, even when it doesn’t benefit you directly, is the surest way to win their loyalty—and it will benefit your agency in the long run.
Dave Evans (dave.evans@iiaba.net) is a certified financial planner and life-health contributing editor for IAmagazine.
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O N T H E H I L L
Chief Deputy Whip Eric Cantor to
Address Insiders’ Luncheon
Rep. Eric Cantor (R-Va.), chief deputy whip of the U.S. House of Representatives, will speak to IIABA’s national leaders during the association’s annual Insiders’ Luncheon on Capitol Hill. The luncheon will be held April 19, immediately prior to the start of the Big “I” 29th annual National Legislative Conference. Luncheon participants will include Big “I” Executive Committee and Government Affairs Committee members as well as agent and broker leaders from Cantor’s home state of Virginia.
“Chief Deputy Whip Cantor’s work in the House is vitally important for independent insurance agents and brokers, and our members will benefit greatly from his insights,” says Charles E. Symington Jr., Big “I” senior vice president of federal government affairs. “We are very happy to have someone of his stature addressing our membership at this important event.”
Cantor last year joined Reps. Pete Sessions (R-Texas), Richard Baker (R-La.) and Sue Kelly (R-N.Y.) in introducing H.R. 4634, the Terrorism Insurance Backstop Extension Act, which would have extended this important program an additional two years through Dec. 31, 2007. In addition to his leading role as chief deputy whip in setting the policy agenda in Congress, Cantor also serves on the powerful Ways and Means Committee, which has direct jurisdiction over taxes and health care.
Cantor, first elected to Congress in 2000, is now serving his third term representing the Richmond area. He rose quickly in the House Republican leadership and was tapped as chief deputy whip shortly after being reelected in 2002. Prior to winning a seat in Congress, Cantor served for nine years as a member of the Virginia House of Delegates, earning praise from Virginia Free, the state’s leading pro-business organization, and the Virginia Health Care Association.
Approximately 1,000 independent agents and brokers are expected to participate in the National Legislative Conference, the industry’s best-attended, most effective legislative meeting. This year’s event will take place April 20 through 22 at the Grand Hyatt Hotel in Washington D.C. Additional leading political speakers will be announced as they are confirmed.
Cliston Brown (cliston.brown@iiaba.net) is Big “I” director of public affairs/media relations.
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F O R M S & S U B S T A N C E
Put it in Writing—How to Select a Producer Contract
Every agency should have a contract with every producer. Every contract should include a clause that governs the solicitation of accounts if the producer leaves the agency. Unfortunately, too many agencies either don’t have such contract provisions or the ones in place are legally unenforceable. So what’s the difference between non-compete, non-piracy and non-solicitation agreements?
Often, the terms “non-compete,” “non-solicitation” and “non-piracy” are used interchangeably. In some ways, it’s a matter of semantics, but as drafted, contracts can fall into one of these categories and courts have viewed their enforceability differently.
A non-compete is just that. You cannot be in the same business in the territory designated by the agreement for the period of time stipulated. In other words, if you sell insurance in Bowling Green and you have a non-compete for three years following termination of employment, you cannot sell insurance in Bowling Green for three years. You are more or less relegated to finding another line of work.
A non-piracy agreement means that you agree not to “steal” accounts under any circumstances for a prescribed period of time. Using the same scenario, selling insurance in Bowling Green, after your employment is terminated, you can go to another agency and continue selling insurance—just not to clients, and sometimes prospects, of your former employer.
Rarely is a true non-compete agreement enforceable these days. Check court cases in your state to see what precedence is being followed. Most states won’t enforce a non-compete because it can deprive a person of their livelihood. A non-compete is sometimes enforceable, however, when it involves the sale of a business. It is almost always a good idea to check with a good agency management consultant when drafting such agreements.
Some agencies may be aware that non-competes are unenforceable in some jurisdictions, but have their staff members sign them anyway. The Wall Street Journal reported on one such non-insurance case where an employee sued his former employer, alleging that he was fired because he refused to sign a non-compete agreement. The employer argued that it couldn’t be held liable because, under the state “unfair business practices” law, the agreement would be unenforceable anyway. The state court of appeals didn’t buy that argument.
According to The Industry Standard, courts are increasingly reluctant to enforce non-compete agreements, even where they are legal. Citing SmartAgreements.com, the article indicates that courts focus on three aspects of a non-compete agreement: (1) Does the employer have a legitimate need for the covenant; (2) Are any geographical restrictions realistic and reasonable; and (3) Is the duration reasonable. In addition, courts are more likely to find a non-compete agreement unenforceable if it is issued after a person’s employment begins.
For more information and to access a free sample agreement download, click here.
Bill Wilson (bill.wilson@iiaba.net) is the Big “I” director of Virtual University. | T O P |
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