T H U R S D A Y ,  J U L Y   2 6 ,  2 0 0 7 

Big “I” National News

Producer Compensation Issue Update

Hartford Settles Broker Compensation, Market Timing Issues
Carrier to launch new supplemental commission program Jan. 1, 2008.

On July 23, The Hartford settled pending investigations with the attorneys general of New York, Connecticut and Illinois regarding alleged improprieties by the company related to insurance quoting practices between 2001 and 2004. The settlement also resolved allegations by the attorney general of New York that The Hartford engaged in improper market timing activities with respect to its variable annuity products from 1998 through 2003. In total, the settlement calls for The Hartford to pay $115 million, with $89 million in restitution ($5 million for the insurance quoting issue and $84 million for the market timing issue) and $26 million in penalties (with $20 million going to New York and $3 million each to Connecticut and Illinois).

Ramani Ayer, The Hartford’s chairman and CEO, commented on the settlement by acknowledging that, “We are pleased to have these matters behind us.” He went on to say that the company has “worked assiduously to strengthen and improve our business practices and will continue to do so. We emerge from this period with an unwavering resolve to uphold our longstanding commitment to providing our customers with outstanding products and exemplary service.”
 
The Hartford President and COO Neal Wolin already reached out to the company’s appointed agents and brokers to assure them that “The Hartford is fully dedicated to growing its business with you. Although the settlement announced…will affect our compensation arrangements going forward, we remain committed to compensating you fairly for the valuable services you provide.”

In a conversation Monday with Debra Perkins, Big “I” EVP and general counsel, Wolin reiterated that message and added that the company will launch a new supplemental commission program to begin Jan. 1, 2008. He told Perkins that under the new program, the total commission payable will be set before covered policies are written, and said that communications about the new program will be provided to agents and brokers in the third quarter. He also noted that The Hartford will honor all 2007 contingent compensation arrangements and that payments under such arrangements will be made in the usual manner and time.

Wolin’s communication with agents and brokers on the settlement indicate that The Hartford expects that “total compensation paid to agents and brokers as a group overall under our new supplemental commission program will be greater than the total amount paid under our former program.”

On the insurance issue, the settlement includes allegations that The Hartford: 1) entered into undisclosed contingent commission and compensation agreements with producers that caused certain brokers to steer business to The Hartford that it might otherwise not have won or retained; 2) set up service centers for brokers to route their clients’ calls directly to employees of The Hartford, without the knowledge of the customers; 3) pursued a strategy with brokers for them to migrate existing business and place a disproportionate share of new business with the company; and 4) provided fictitious and intentionally losing quotes on certain business in exchange for favorable consideration on other business.

The settlement requires The Hartford to set up a $5 million fund to pay its policyholders that purchased or renewed small and middle market insurance policies through the company’s Lake Mary, Fla. or Los Angeles, Calif. offices from Jan. 1, 2001 through Sept. 30, 2004 where Marsh Advantage America or Marsh Global Broking acted as the producer.

The Hartford also agreed in the settlement to a number of business reforms for its p-c business. These reforms do not apply to “group and individual: (1) fixed and variable life insurance; (2) fixed and variable, immediate and deferred annuities; (3) accidental death and dismemberment insurance; (4) short- and long-term disability insurance; (5) long-term care insurance; (6) accident and health insurance, including vision and dental insurance; (7) credit insurance; (8) involuntary unemployment insurance; (9) guaranteed investment contracts and (10) funding agreements.”

The business reforms The Hartford agreed to are much like those in prior settlements of other carriers with the same attorneys general involving allegations of improper practices relative broker compensation, and include:

Disclosure notice: Starting six months from the date of the settlement, The Hartford agreed to send a notice with each insured’s policy stating that information concerning the company’s compensation practices and policies can be obtained either from a Web site or toll-free telephone number. The information provided to insureds is to be sufficient to inform them of the “nature and range of compensation, by insurance product, paid by The Hartford.”

For the purpose of the settlement, the term “compensation” is defined as it has been in prior settlements involving other carriers, and is as follows:

Compensation means “anything of material value given to a producer including, but not limited to money, credits, loans, forgiveness of principal or interest, vacations, prizes, gifts or the payment of employee salaries or expenses,” but it specifically excludes “customary, non-excessive meals and entertainment expenses.”

“Contingent compensation” also is defined similarly to prior settlements involving other carriers but includes some additional language to clarify that certain payments do not constitute contingent commission. Under the settlement:

Contingent compensation means “compensation contingent upon any producer: (a) placing a particular number of policies or dollar value of premium with Hartford; (b) achieving a particular level of growth in number of policies or dollar value of premium with Hartford; (c) meeting a particular rate of retention or renewal of policies in force with Hartford; (d) placing or keeping sufficient insurance business with Hartford to achieve a particular loss ratio or any other measure of profitability; (e) providing preferential treatment to Hartford in the placement process, including but not limited to giving Hartford last looks, first looks, rights of first refusal or limiting the number of quotes sought from insurers for insurance placement; or (f) obtaining anything else of material value for Hartford. This definition does not include compensation paid to employees of Hartford or to their producers that are captive or are exclusive to Hartford with respect to a specific line or product that is clearly and conspicuously identified in marketing materials as Hartford’s line or product.”

The additional language in the definition of contingent compensation in the settlement is the express exclusion of “fixed commission paid to a producer, set prior to the sale of a particular insurance product, and that may be based on, among other things, the prior year’s performance of the producer.” As a result of this exclusion, the settlement does not “prohibit Hartford from (i) determining, by producer, the amount, manner and frequency of such fixed commission payments; (ii) committing in advance, contractually or otherwise, to pay a higher fixed commission set prior to the sale of a particular insurance product on business produced after a specified time period; (iii) measuring and assessing a producer’s performance during the specified time period; (iv) communicating with the producer, during the specified time period, regarding its performance metrics; or (v) paying such fixed commissions set prior to the sale of a particular insurance product in cash or in kind to a producer based on the producer’s past performance.”

Limits on payment of contingent compensation (65% tipping test): The Hartford agreed not to pay contingent compensation on any insurance line (or product/segment) if: i) insurers who do not pay contingent compensation in a given line/product/segment (including but not limited to direct writers and insurers that employ only captive agents in the line/product/segment); and ii) insurers who have signed agreements with the New York attorney general or other state attorneys general with this restriction: “together represent more than 65% of the national gross written premiums in the given insurance line (or product/segment) in the calendar year for which market share data is most recently available.” If these conditions are met, the restriction on paying contingent compensation goes into effect on Jan. 1 of the next calendar year. The basis for the 65% market share calculation is information from the National Association of Insurance Commissioners, A.M. Best or another agreed upon source if needed data is unavailable from either of those. If the 65% market share drops below 60% in any subsequent calendar year, The Hartford can notify the attorneys general of the change and pay contingent compensation if the attorneys general do not object within 60 days to The Hartford’s determination that the market share is below 60%.

Stop paying contingent compensation for certain lines of insurance: Starting Oct. 1, The Hartford will stop paying contingent compensation for the following lines: “Homeowners multi-peril, private passenger automobile physical damage, private passenger automobile no-fault, other private passenger automobile liability, boiler and machinery and financial guaranty.” These are the same lines where the 65% tipping test was met with other carriers that previously settled with the attorneys general of New York, Connecticut and Illinois.

Controls on Book Rolls: The Hartford agreed not to accept transfers of 25 or more policies unless the arrangement includes written notice to affected insureds of the reason for the policy transfer (including any compensation paid to the producer relating to the transfer) and a statement that the insured can review and get information on the company’s compensation policies and practices from a Web site or toll-free number.

Controls on Service Centers: The Hartford agreed to require anyone communicating on its behalf with any consumer or insured through a company-sponsored or affiliated service center to “immediately and clearly identify themselves to the consumer and/or insured as representing Hartford.”
Support legislation/regulations to abolish contingent commission: The Hartford agreed to support legislation and regulations in the United States to “abolish contingent compensation for insurance products or lines” and “require greater disclosure of compensation.”

Prohibition on Pay-to-Play: The Hartford agreed not to offer or pay any compensation other than a fixed commission set prior to the sale of an insurance product as a condition to a producer’s willingness to sell Hartford insurance to its clients.

Prohibition on Bid Rigging: The Hartford agreed not to provide false or artificial quotes or indications.

Implement standards of conduct and training: The Hartford agreed to implement written standards of conduct relative to compensation paid to producers, including training company employees on business ethics, professional obligations, conflicts of interest, antitrust and trade practices compliance and record keeping.”

On the market timing issue, the settlement alleges that The Hartford breached its fiduciary duty to investors in its variable annuity mutual funds by failing to prevent hedge funds and other entities from dilutive or otherwise harmful “market timing” practices, that it invested in an entity that was engaged in market timing Hartford’s own variable annuities to the detriment of long-term investors, and that it did not make disclosures in prospectuses as early in time as it could have concerning such practices. The settlement requires The Hartford to implement written standards of conduct concerning the prevention of harmful market timing and conduct training for employees on business ethics, professional obligations, conflicts of interest, compliance and record keeping.

The settlement states that The Hartford is not admitting any wrongdoing.

For more information about producer compensation issues, or to view the settlement and press releases relating to it, log in as a member to www.independentagent.com, go to “Legal Advocacy” and select “IIABA/Industry Information and News,” or contact Kathleen Graber, associate general counsel, at 703-706-5432; kathleen.graber@iiaba.net.




L&H Trends

Reassuring Clients When Markets are Roiling
Help them stay the course by providing financial education.

Global warming is a hot-button topic lately, with both sides of the debate pointing to empirical data to buttress their arguments. The global warming believers point to slight increases in average temperatures, while naysayers say the problem is being overblown as history points to a number of cycles where global temperatures have increased then eventually decreased. There seems to be a similar phenomenon with stock market indices’ volatility.

New academic studies indicate that there are more frequent occurrences of meaningful ups and downs in the stock market, measured by a 1% or more increase or decrease during a given day’s trading. Explanations for the increase in volatility point to trading programs that react to economic indicators and market anomalies that large institutional traders typically use. Of course, the media likes to amplify the ups and downs to create attention and attract viewers.

Ask any successful entrepreneur about the history of his company, and he often will tell you that the most important deal wasn’t the one that he did but the one that he decided not to do. Whether it is instinct or based on the advice of advisors, staying the course proved to be the best strategy.

Independent insurance agents can provide that same valuable counsel to their clients through basic financial education. Since the end of World War II, the market has produced a negative return one out every four years. No one knows the exact year, so they are conditioned to the concept of risk and return. The capital markets are based on the premise that above-average investment returns cannot be guaranteed and that in order to participate in the up years, one will occasionally experience a negative return.

It’s key that investors understand that the amplitudes of the market become less noticeable over a longer timeframe. Instead of focusing on monthly, quarterly or even annual returns, clients need to consider when they will need to use their investments. If they don’t need to begin to withdraw funds to meet their financial obligations, they will be able to use a long-term viewpoint. And, if they diversify, which helps minimize the financial risk of any single investment, and rebalance their portfolio when any one segment (growth stocks, large value stocks, etc.) becomes too concentrated, then history should be on their side and they will end up fine.

We all need reassurance when it comes to important matters, particularly financial ones. Investors are better served by not responding to the ups and downs of the stock market, but instead mapping out a plan based on their needs and circumstances, monitoring the plan and then occasionally making adjustments that reflect changes to the influences that dictated their investment plan. Independent agents should perform at least an annual review with their clients to ensure that they do not feel alone as they navigate through life’s complexities. And, it’s a great opportunity to discover if they need additional life, disability or long-term care insurance. It’s amazing how many clients don’t realize that their independent insurance agent offers these insurance products. Make sure your clients are aware of everything your agency offers.

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and an IA l-h contributing editor.




L&H Trends

Does Michael Moore Get It?
Readers respond to ‘SiCKO’ column questioning film’s view of U.S. healthcare system.

Last week’s IN&V includes the article  “Michael Moore Doesn’t Get It” by Dave Evans. In the article, Evans counters some of Moore’s claims in the movie “SiCKO,” asserting that: “Let me be the first to say that our health care system is not perfect and there is room for improvement. But the movie only focuses on the shortcomings of the American system and not its successes, which are the norm and not the exception.”

The article generated strong reader reactions, including the following:

I have to comment on your article in Insurance News & Views...

Someone must focus on the negatives in order to effect change. The health care system in this country is a mess. You may be upset because your livelihood somewhat depends on selling health insurance. I know all health insurance companies are not bad, but as a whole the system must be overhauled. I have been in this business for over 25 years and it has been very good to me. However, I have never lost sight of what is really important…people. Not just the almighty dollar.

Best wishes and good health to you,

Kimberly A. Bates, CIC, CPIA
Aronov Insurance, Inc.
Alabama Insurance Alliance, Inc.


Thank you for your e-mail and for being a member. Yes, I would not disagree with your assessment that the health care system is a mess. However, I get frustrated by all of the state mandates, federal programs that shift costs to private payers and then people like Michael Moore totally condemn our system without pointing that the government shares responsibility. I would love to see more flexibility to allow creative approaches to solving the problems and to lower the cost to allow more people to afford to purchase health insurance.

Best wishes and I'm sure that will be a lot more debate on this topic,
Dave


I appreciate your article today. I would be interested, though, in reviewing some statistics regarding the “myriad of regulations and mandates that result in plans that are very expensive” and also a breakdown of what percentage of each medical dollar goes toward what expense within the medical field. Locally, our hospitals have never-ending remodeling jobs and seem to have money to spare.

If the exorbitant costs of healthcare truly are caused by regulations and mandates then we’re back to the old standby: “The first thing we do, let’s kill all the lawyers!” 

Karen S. Hammock, CIC, CRM
Dillingham Insurance


Thank you for your e-mail and for being a member. There are indeed a number of studies that estimate the amount of waste and overhead that exists in the system. However, we also know that the other extreme is controlled access to health care. My concern with “SiCKO” was the missed opportunity to really provide a balanced discussion of what works and what doesn't and then enact reforms to help solve the problems and capitalize on the positive aspects.

Stay tuned for what will be a lively debate.
Regards,
Dave


I saw the movie, too, and am an agent/consultant with lots of gray hair, and I came away with a totally different conclusion.

Unless the cost of health care in the United States becomes affordable and everyone has easy access to quality care and cutting edge drugs, the only result I can see is nationalized health care. 

I think the kids in the audience watching “SiCKO” came away with a message that will grow into expectations for the next generation. (Yes, they applauded in my movie, too.) Holding on to the old system will not be an option then.

Walter Bounds


What do you think? Join the debate by sharing your thoughts and opinions on “SiCKO” with IN&V writer/editor Michelle Payne at michelle.payne@iiaba.net or Evans at dave.evans@iiaba.net.




On the Hill

OFC Bill Introduced in House 
Big ‘I’ voices opposition to National Insurance Act of 2007.

Rep. Melissa Bean (D-Ill.) and Rep. Ed Royce (R-Calif.) introduced the National Insurance Act of 2007 (NIA) yesterday in the House of Representatives.

Rather than creating a massive new federal bureaucracy under an Optional Federal Charter (OFC) bill, the Big “I” instead supports targeted federal legislation to reform the state insurance regulatory system, which relies on the over 100 years of skill and experience of states as insurance regulators. An example of such a pragmatic approach is H.R. 1065, the Nonadmitted and Reinsurance Reform Act of 2007, sponsored by Rep. Dennis Moore (D-Kan.) and Rep. Ginny Brown-Waite (R-Fla.), which passed the House by voice vote last month. The legislation would help create uniformity in the surplus lines and reinsurance markets.

“We share the belief held by virtually every player in the insurance market that there needs to be reform of the existing regulatory system,” says Big “I” CEO Robert A. Rusbuldt. “Change is overdue, and nearly everyone agrees that the existing system can be slow, inefficient, and duplicative. The Big ‘I’ supports the need to update the regulatory system, but creation of a new federal bureaucracy is not the answer.”

Although the need for greater efficiency and uniformity is clear, consumers and industry participants have many reasons for opposing OFC, including:

• Local insurance regulation works best for consumers and the state system ensures a level of responsiveness to consumers that could not be matched at the federal level.

• The dual state/federal system established by the NIA would confuse consumers and could create coverage gaps.

• While addressing some of our members’ licensing concerns, the Big “I” believes the NIA would lead to additional regulatory burdens on agents and brokers and would negatively impact our members’ ability to represent their customers by establishing a distant federal regulator in Washington, D.C.

• The dual structure established by the NIA could have disastrous implications for solvency regulation by largely bifurcating this key regulatory function from guaranty fund protection.

• The NIA would negatively impact revenue through a loss of licensing fees and, potentially, state premium tax revenue—critical funding heavily relied upon by the states for various purposes.

• The creation of a new, large federal bureaucracy could lead to new taxpayer burdens, less consumer protections, and a regulatory maze for both consumers and agents.

“The NIA would create dual federal/state regulation as a substitute for the existing state-by-state system, which would heighten, rather than diminish, regulatory burdens on our membership and create confusion for the customers we serve,” says Charles Symington, Big “I” senior vice president for government affairs and federal relations. “A new federal regulator located in Washington, D.C. brings a host of new problems, including unresponsiveness to market differences among the states. The solution to modernizing insurance regulation is to reform the state-based system through targeted federal legislation not to create a cumbersome new federal bureaucracy.”

The Big “I” advocates for a pragmatic, middle-ground approach that uses targeted federal legislation to improve state insurance regulation by creating a more uniform and streamlined regulatory system. This approach would overcome state-level impediments to reform and build on, rather than dismantle, the states’ inherent strengths—diversity, geographical uniqueness, innovation and responsiveness to consumers—to meet the challenges of a rapidly changing insurance marketplace.

“Targeted reform of the state-based system such as the Nonadmitted and Reinsurance Reform Act is the appropriate remedy for the marketplace’s problems, and is the only solution that has gained broad industry and bipartisan support, as evidenced by passage of this bill by voice vote in the House last month,” says Tom Koonce, assistant vice president for federal government affairs. “The Big “I” hopes that industry participants will support this approach to much-needed reform that will benefit consumers now,” Koonce concluded. “We believe that speed to market, agent and company licensing, market freedom and other insurance regulatory concerns can be addressed efficiently and more expeditiously under this approach than under the creation of a new federal bureaucracy.”

Patrick Royal (patrick.royal@iiaba.net) is Big “I” director of public affairs.




Agency Management

Can Agents Pay for Referrals?
How can a p-c agent share commissions with an l-h agent?

The Virtual University “Ask an Expert” service recently received the following question: “We have a relationship with a life insurance agent who has access to our clients and our files. He would like to split the commission on the p-c business that he refers to our agency. Can we split commissions with someone who does not have a p-c license? If not, can you call it something different like a finder’s fee? If not, what alternatives do we have?"

This is a common question, although it arises more often with referrals that originate outside the insurance industry, such as real estate agents or car dealers. The only absolute answer is to check with your state association or department of insurance.

For a general perspective, here are VU faculty members’ views on the matter, along with examples of states that are exceptions to the general rule:

• “It is illegal in most states to split commissions unless the life agent is p-c licensed. You can certainly give him finder’s fees for referrals (not based on sales) or help him with marketing and advertising costs. The amount of compensation between cross-selling agents is all over the field. The key is to make it equitable. He’s going to probably pay you once for life policies (unless you are listed as a sub-agent under his agency—in that case, you are the agent of record and get the residuals). If he sends you p-c accounts, identify if the number referred to him equals the number referred to you, and then pay him on a per lead basis so that both parties realize equivalent values.”

• “In most states, you cannot pay commission to someone who is not properly licensed. You can, however, pay a finder’s, fee but it cannot resemble a commission split. Many agencies will set up a grid that gives commission ranges and sets an appropriate fee. For example, for commissions under $250, nothing; then $250 to $500, a one-time fee of $50 and so forth. The key about finder’s fees is that you can only pay them one time. Of course, the alternative is for the life producer to get his p-c license.”

• “In New York, you may pay referral fees to an unlicensed person (i.e., a licensed life insurance agent who does not hold a p-c license), provided that the unlicensed person does not discuss policy terms and conditions with the person referred and you pay the fee whether or not you make the sale. See N.Y. Insurance Law Sections 2114, 2115 and 2116. You can find a recent New York Insurance Department advisory legal opinion on this subject at www.ins.state.ny.us/rg040505.htm.”

• “In Connecticut, you can pay a referral fee to any non-licensed person. The non-licensed person cannot refer herself and cannot act in anyway as a producer. The referral fee can be any amount and can be paid on renewals. Refer to CT DOI Bulletin L-13 (item 12) dated July 24, 2002.”

For additional information, including more states, including Pennsylvania, that have exceptions, click here.

Bill Wilson (bill.wilson@iiaba.net) is the Big “I” director of Virtual University.