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 Big “I” National News

Producer Compensation Issue Update
Contingent Comp Returns for Gallagher
Will other brokers follow suit?

Arthur J. Gallagher & Co. announced Tuesday that it will accept contingent commissions again on retail business, starting on Oct. 1, 2009. This change of course  is possibly due to amendments of the company’s agreements with the Illinois attorney general and Illinois Department of Insurance that previously barred acceptance of such payments. 

The company discussed the development on its second quarter earnings call Wednesday, during which J. Patrick Gallagher, Jr., chairman, president and CEO, commented that “We’ve said all along that we were willing to give [contingent compensation] up if the rest of the industry was going to follow.” 

Gallagher added that he projects the company will generate about $10 million on an annualized basis by 2011 from contingent commissions. He said that amount is in addition to supplemental compensation, which recaptured about two-thirds of the revenue previously generated by contingent commission.

Gallagher said the company had met with the Illinois attorney general’s office about 25 times since 2005 to discuss this issue. He added that once the Illinois attorney general and Department of Insurance realized that “the industry standard of contingent commissions was not going to change –[they] agreed that it would be unfair to leave us in a situation where we could not collect them.” He also reiterated the firm’s commitment to full transparency and disclosure with clients, which he said “resolves any conflicts” and “fosters trust.”

Speculation abounds if other brokers subject to settlements barring acceptance of contingent compensation will be able to get their agreements amended. To the extent these brokers  have not made up for the loss of contingent compensation with supplement commission or other fees, it is likely some will seek  amendments, characterizing the new landscape as an unlevel playing field where they are at a disadvantage, especially since contingent compensation is legal.  

Reactions to the development have been mixed. The Big “I” continues to support free market principles, including the right of carriers to pay and producers to accept incentive compensation. RIMS expressed disappointment with the development, however, stating in a press release Wednesday that “contingent commissions should be broadly prohibited as they represent an inherent conflict of interest.”

Kermitt J. Brooks, Acting Superintendent of New York Insurance Department, said he felt the settlement agreements need to be looked at “determine whether or not [they] still work” with the goal of increasing fee disclosure and leveling the playing field. From the broker perspective, Dan Glaser, Marsh chairman and CEO, weighed in with a statement indicating that the company “continues to believe that the settlement agreements should sunset and that a clear set of rules grounded in transparency should apply equally to all insurance producers.”  Willis chairman and CEO, Joe Plumeri, expressed a different view Thursday on a call with analysts, stating that Willis will not collect incentive compensation even if the firm’s settlement agreement is sunset.   He added that while he expects the firm to be paid the same amount as competitors receive in contingent commissions, the fee will not be based on volume or profit because that creates a conflict of interest with the firm’s clients. Other brokers have not yet made  public comments in response to Gallagher’s announcement.

While no one can predict the future, it is hard to imagine that other producer compensation settlements will remain as executed, without amendments. The efforts to change those agreements will likely take place in private, just like the negotiations leading up to the settlements themselves. The Big “I” believes that a strong and competitive insurance environment is critical for consumers, and that competition is fostered by preserving the right of carriers to decide how to compensate their sales forces, including the right to offer and pay incentive compensation within the law.

Debra Perkins (debra.perkins@iiaba.net) is Big “I” executive vice president and general counsel. 



Producer Compensation Issue Update
New York Continues Work on Compensation Disclosure Proposal
Latest revisions offer improvements, but concerns remain.

One year ago, the New York State Insurance Department reopened the relatively dormant issue of insurance producer compensation with a series of public hearings and said the agency intended to establish new compensation disclosure requirements. Draft regulation was floated in late January, and the much-anticipated second draft was released by the department earlier this month. The revisions offer a mixed bag for producers who do business in the Empire State.  

The latest proposal would require independent agents and brokers to make a series of unprecedented disclosures to every customer prior to binding any insurance contract. The producer would be required to disclose whether he/she represents the purchaser or the insurer in the transaction (so-called “role disclosure”), that he/she will be compensated by the insurer for the sale of insurance (if applicable) and that the compensation received varies from company to company and from policy to policy. The draft proposal would also require the producer to inform the purchaser that he or she may request information about the source and amount of compensation and any alternative quotes considered at any time. If this information is requested by the buyer, then the producer must provide “detailed description[s]” of the “nature, amount, and source of any compensation to be received” and “any alternative quotes obtained or considered,” including information concerning the differences in coverage, premium and compensation under each alternatives. 

While the proposal may sound burdensome, several key improvements were included. The initial version of the proposal required producers to make prominent written disclosures concerning the nature and amount of their compensation and all quotes received in connection with every sale. Under the revised framework, the availability of this information must be disclosed in every instance, but producers must only provide detailed information when requested by the consumer. 

Unfortunately, not all of the revisions were positive, and three changes are particularly troublesome for independent agents and brokers. First, the addition of the “role disclosure” is especially problematic. This requirement is subjective, difficult for producers to comply with, likely to convey misleading information to buyers and offers no meaningful value to the consumer. Second, the draft requires agents and brokers to be prepared to make detailed disclosures regarding every quote obtained or considered. This is a change that will impose new burdens and responsibilities on many agents, force major changes in operational systems and potentially have anti-consumer ramifications. Third, the initial draft applied equally to all industry distribution channels, but the most recent version eliminates that parity and creates an uneven playing field by exempting certain types of agents and salespeople from the regulation. 

While many in the independent agent and broker community continue to question the necessity and purported consumer benefit of such a proposal, it is important to note that the New York State Insurance Department has been willing to openly discuss these issues with Big “I” representatives.  These conversations and ongoing discussions have been helpful and informative – for both sides – and IIABA’s national and state associations will continue to actively represent the interests of producers across the country. 

The Big “I” has received many inquiries about the status of the New York deliberations. Here are answers to the most frequently asked questions:

• What is the status of the proposed regulation? The proposal is not final and has not been implemented.  The insurance department is expected to continue vetting and considering revisions to the draft, and it is unclear when regulators will initiate the formal rulemaking process. 

• Does the insurance department have the statutory authority to promulgate such disclosure requirements?  Many industry and legal observers question the legality of such a regulation, especially in light of recent New York appellate court cases suggesting that there is no statutory foundation for imposing such disclosure mandates. The department’s final proposal may ultimately be challenged in the courts, and the likelihood of such an action increases if the promulgated regulation is expansive and unduly burdensome. 

• How will the state legislature respond? State legislators are often protective of their policymaking turf, and elected officials may not look favorably on any final proposal that imposes particularly sweeping, legislative-like mandates. 

• How will this regulation affect the mega-brokers that entered into restrictive settlements with Eliot Spitzer and others in 2005? The big brokers that agreed to forego contingent commissions and accept certain disclosure mandates are closely monitoring this process, and some speculate that there may be a connection – or “linkage” – between the implementation of an across-the-board disclosure mandate and the big brokers being released from their settlements. On a related note, in the wake of the announcement concerning the revisions to Gallagher’s settlement, a spokesman for the New York Insurance Department stated that “[o]ur goal is to level the playing field and, at some point, we will need to revisit the settlement agreements and see if they still work.” Dan Glaser, chairman and CEO of Marsh, offered a similar sentiment and stated that Marsh “has consistently advocated for a level playing field” and “continues to believe that the settlement agreements should sunset and that a clear set of rules grounded in transparency should apply equally to all insurance producers.”

• Has any other state implemented this type of disclosure requirement? Several states in recent years have established disclosure requirements for producers who are compensated in the same transaction by both the insurance company and the purchaser, and many states require disclosure when a producer charges a fee to a buyer. No state, however, has implemented the type of requirements proposed in New York, and the breadth of the proposal exceeds the recommendations developed by the National Association of Insurance Commissioners and the National Conference of Insurance Legislators. Even if the department accepts the suggestions previously offered by the Big “I,” the proposal would establish the most extensive compensation disclosure framework in the country.

• How would such a regulation affect agents outside of New York? Any resident or nonresident writing business in New York State would be required to comply with the regulation (at least for risks located in the Empire State). Although some have speculated that other states might consider implementing similar requirements, there has been little debate about compensation disclosure mandates outside of New York in recent years and most policymakers elsewhere have concluded that instituting such disclosure requirements is unwarranted. 

Wes Bissett (wes.bissett@iiaba.net) is the Big “I” senior counsel, government affairs.



P-C Trends
AIU Holdings Rebrands P-C Insurance Unit Under New Name
The company formerly known as AIG changes its name to Chartis.

AIU Holdings, Inc., the offspring property-casualty company of American International Group (AIG), is once again rebranding itself under a new name --- Chartis.

The company was officially launched Monday, with Kristian Moor, the former vice president of AIG’s property-casualty group, serving as Chartis’s president and CEO. The rebranding comes just four months after AIG established AIU. (Click here to read the Insurance News & Views article regarding the formation of AIU). According to Chartis, the new brand is yet another step toward furthering the company’s “operating independence.”

“We are excited by this new stage in our evolution, which will sharpen appreciation for the value of one of the most experience and extensive insurance platforms in the world,” said Moor in a statement. “Chartis employees are our greatest asset and our new brand embodies their relentless pursuit of excellence through innovation and an unwavering commitment to meeting clients’ needs.”

According to a Chartis spokesperson, the company will continue to offer the same products and services to agents, brokers and customers that were available under the AIU Holdings/AIG monikers.

“With the unification of our U.S. and international operations, customers could expect to see even better global, integrated service in the future,” the spokesperson said. “We will continue to be innovators and look to meet their current and emerging risk management needs.”

Overhauling a brand is often a risky endeavor for any consumer-driven industry, since the new name/image could elude some customers. However, in Chartis’s case, the move was less of a gamble due to its size and reputation, according to Bob Hartwig, president of the Insurance Information Institute (III).

“The reality is that AIG, then AIU, then Chartis is a very large property-casualty company and that name will quickly be well known throughout the producer community, as well as [with] insurance buyers,” Hartwig says. “Buyers of insurance will remain first and foremost concerned with the same things they’ve always been---safety, security, quality of claims handling---none of these things will change and buyers of insurance , as well as the agents…will be able to provide that to buyers regardless of name.”

Chartis is derived from the Greek word for map, and, according to the company, was chosen to “underscore the company’s 90-year history as a successful global pioneer.”

“I think they felt it (changing the name) was necessary, as well as representative of where the company will be positioned in the future, and by choosing a name like Chartis what they did was invoke the sense of a global company…which is what Chartis is,” says Hartwig.

The company is product of three former AIG units --- commercial insurance, foreign general insurance and private client group----and while Chartis is now a separate entity, it continues to be owned by AIG.

Click here to visit Chartis’s Web site.

Michelle Payne (michelle.payne@iiaba.net) is IA’s managing editor.


Legal Advocacy
FTC Announces Red Flag Rule Enforcement Delay 
Covered entities have more time to prepare for compliance.

The Federal Trade Commission (FTC) announced yesterday that its enforcement of the Identity Theft Red Flag Rule (“rule”), scheduled to begin on Aug. 1, now will be pushed back to Nov. 1. This new three-month postponement follows prior enforcement delays of nine months, but does not apply to other federal agencies’ enforcement of the original Nov. 1, 2008 compliance deadline for institutions subject to oversight. 

The FTC statement on the new delay indicated that its staff would use the extra time to continue efforts to educate small businesses and other entities about the rule and “ease compliance by providing additional resources and guidance to clarify whether businesses are covered by the rule and what they must do to comply.” The current FTC Web site about compliance with the rule, at http://ftc.gov/redflagsrule, already includes a template under the Create Your Program tab to assist entities in developing an identity theft prevention program. The FTC said it plans to add a special link to that site with additional guidance and information about the rule.
  
The delay and additional guidance to be provided by the FTC are consistent with the recent request by the House Appropriations Committee that enforcement of the rule be deferred “in conjunction with additional efforts to minimize the burdens of the rule on health care providers and small businesses with a low risk of identity theft problems.”
 
In short, the rule requires “financial institutions” and “creditors” that hold “covered accounts” to implement a written program (“program”) to detect warning signs or “red flags” of identity theft, so that identity theft can be prevented and mitigated.

Some key definitions under the rule, in general terms, include:

 - Financial institutions - state/national banks, state/federal savings and loan associations, mutual savings banks, state/federal credit unions or any other entity with an account from which the owner makes payments/transfers.

- Creditor – a person, business or entity that provides goods or services in advance of receiving payment (e.g., arranges, extends or renews credit).

- Credit - the right granted by a creditor to a debtor to defer payment of a debt or to purchase property/services and defer payment for them.

- Covered account – an account used for a personal, family or household purpose involving multiple payments (e.g., credit card accounts, checking accounts, car/home loans).

The FTC is taking a broad view of what activities meet the key definitions under the rule. That creates questions by some insurance agencies about whether the rule applies to them, and if so, the nature of the compliance program they need. Since insurance agencies each operate differently, there is not one answer to those questions that applies across the board to all agencies. Each agency needs to assess the definitions under the rule carefully in light of its own unique operations and activities to determine if it must comply with the rule.
 
An insurance agency only needs to comply with the rule it if acts as a creditor or financial institution and has covered accounts. It does not need to comply merely because of its status as an insurance agency. For example, if all business of an agency is direct billed by carriers, then the agency would not be a creditor or have covered accounts, and thus it would not be subject to the rule. On the other hand, if the agency provides or arranges premium financing for insureds, then it appears that the FTC will take the position that the agency is acting as a creditor with covered accounts, and needs to comply with the rule.
 
Accepting credit card payments credit card payments alone does not make an agency a creditor under the rule, nor does merely passing along an advertising brochure to a customer for it to seek third party financing. But, a business that “regularly arranges for the extension, renewal or continuation of credi,t” such as mortgage brokers and auto dealers, will be considered to meet the rule’s definition of a creditor.  And if a creditor, be it an insurance agency or any other business, has covered accounts, then that business must comply with the rule. In other words, it is not the line of work a business is in that controls whether or not it is subject to the rule; rather, it is the activities of the business that determine if it is subject to the rule.

Insurance agencies with questions about whether the rule applies to their specific business activities can seek guidance from local counsel. In addition, some agencies in this position, out of an abundance of caution, may choose to comply with the rule, rather than spend time or money seeking a definitive answer to a question that may be unduly complex by virtue of the way the rule is written. For insurance agencies that decide to adopt an identity theft program even if not required to do so, the program requirements under the rule may be a good starting point for deciding what to include in the program.

There is no standard compliance program businesses subject to the rule can adopt because each program has to be customized to the size, complexity, organizational structure and operations/activities of each individual business.
 
A program must enable the business covered by the rule to:

1. Identify red flags (described below) relevant to the entity’s experience, industry, and likely risks.
2. Detect the red flags identified.
3. Respond appropriately to red flags that are detected in an effort to prevent and mitigate identity theft.
4. Update the program periodically to reflect changes in risk.

Red flags or warning signs of identity theft may come from things such as past incidents of identity theft, reports in industry publications and information published by regulators like the FTC. Examples of red flags can include warnings/alerts from credit bureaus, presentation of suspicious documents (such as those with suspicious personal identifying information or a suspicious address change) and notice from a person who believes he/she has been a victim of identity theft.

An entity required to have a program must have the initial program approved by its board of directors or an appropriate committee of its board of directors. In addition, the board of directors, an appropriate committee of the board or someone from senior management must be involved in the oversight, development, implementation and administration of the program, and the entity’s staff must be trained to implement the program. 

The FTC can seek monetary civil penalties and injunctive relief for failure to meet the requirements of the rule, but there is no private right of action available to consumers for violations of the rule.
A summary of the rule is included in a memo called “Overview of the Fair Credit Reporting Act, the Fair and Accurate Credit Transactions Act, and the Drivers Privacy Protection Act” starting on page 10 at letter G. That summary is available to Big “I” members who log in to www.independentagent.com and select Legal Advocacy, under Memoranda and FAQs. The Big “I” will continue to monitor the FTC site for any additional information, and report on any developments that may affect independent insurance agencies.  

Debra Perkins (debra.perkins@iiaba.net) is Big “I” executive vice president and general counsel.


On the Hill
House Passes National Flood Insurance Program Extension
Permanent solution for NFIP that protects homeowners and small businesses still needed.

Yesterday the U.S. House of Representatives passed the National Flood Insurance Program (NFIP) Extension Act of 2009, H.R. 3139, which extends the program until March 31, 2010. The NFIP is currently set to expire on Sept. 30, 2009. 

The Big “I” praised the temporary extension as a significant and welcome development for the millions of homeowners and small businesses who count on the NFIP as a safety net in the event of flooding. If the NFIP is allowed to expire, millions of consumers will be left vulnerable the next time a flood devastates a community.

Recent years have provided far too many examples of the destruction left behind by floods that highlight the urgency and importance of updating the NFIP. The Big “I” strongly supports a long-term reauthorization that contains significant reforms, especially an increase in maximum coverage limits and the addition of optional business interruption insurance.

Earlier this year, President Barack Obama signed an extension just hours before the program was set to expire. The most recent extension should provide Congress ample time to continue working on long-term improvements to the much-needed program. Under the 110th Congress, the Flood Insurance Reform and Modernization (FIRM) Act of 2007 made progress in the House and Senate. The legislation would have extended the program for five years and would have made significant and needed reforms to help put the program on sound financial footing. The effort is expected to move forward once again under the current Congress.

The Big “I” strongly believes that homeowners and businesses need both higher coverage limits and business interruption insurance to adequately insure their property. The association is optimistic that as Congress will include these reforms in legislation as it considers a long term reauthorization and looks forward to working with the Obama administration and Congress for a more permanent solution.

Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.