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Insurance: Take A Good, Hard Look

Here's how the Spitzer investigations of the industry could affect you

New York State Attorney General ELiot Spitzer's investigations into possible anticompetitive practices and fraud at some of the insurance industry's largest brokerage firms have led to a small miracle: They have made insurance a hot topic. And it's getting hotter, with Spitzer announcing a suit on Nov. 12 against Universal Life Resources. He charges the San Diego benefits consultant with steering business to insurers "in exchange for lucrative payoffs." Here's how your personal policies such as homeowner's and auto might have been affected by the practices Spitzer is targeting.

Are issues in the Spitzer inquiries relevant to me as an individual?
Yes. Even though Spitzer started off investigating big commercial brokers that cater mostly to large corporations, there is a trickle-down effect on individuals. When companies pay inflated premiums, there's less money left to boost salaries and benefits for employees. It certainly costs shareholders as well.

Does the latest lawsuit bring the issues closer to home?
Yes. As in the earlier investigation focusing on Marsh & McLennan, Universal Life Resources (ULR) was accused of steering clients to favored insurers. In addition, Spitzer's complaint alleges ULR tacked an undisclosed fee on to supplemental insurance policies bought by a company's employees. That fee ran $5 to $10 per employee per year. "What is particularly egregious in this case is that the costs of ULR's concealed payments were ultimately borne by individual employees," Spitzer said in a written statement. Says ULR's attorney: "We disagree with a number of the conclusions set forth in the complaint, and we look forward to discussing these with Mr. Spitzer's office."

What conflicts might my agent have?
Your agent may receive "contingent commissions" -- incentive payments based on the dollar volume of premiums generated, renewal rates, and on the profitability of policies. In personal lines of insurance, as in the corporate world, the issue is whether these extra payments are influencing agents to steer you not to the policies that are the best combination of price and terms for you, but rather to the insurers paying them these extra commissions.

How could this affect my coverage?
If your insurance agent recommended a policy based on the contingent commissions, you might not have received the best quality coverage possible. You may, for instance, have been sold a policy from a company that makes it particularly difficult to collect on water-damage claims. Or a claim you filed under your auto or homeowner's policy might have been delayed by an agent who feared it would make his "loss ratio" for a particular period -- the percentage of dollars in claims paid, measured against the premiums paid by buyers -- too high. Those ratios are key in determining bonus payments.

How do I know if my insurance agent is getting a contingent payout?
You have to ask. Your agent should give you an honest and accurate answer. Amy Bach, executive director of United Policyholders, a consumer advocacy group, said her agent told her these payouts amount to 20% on top of his regular commissions. A leading association of independent agents pegs the payments at 2% to 14% of an agency's revenues.

Are all authorities likely to push for more disclosure?
Insurance is regulated on a state-by-state basis, so making generalizations is difficult. But in California , for example, case law says that an agent or broker has a fiduciary duty to provide accurate information to a consumer and to be honest in response to any questions you ask. But in California , insurance commissioner John Garamendi, who has been a strong consumer advocate, is proposing new state regulations that require agents and brokers to reveal financial incentives they get for selling certain insurance products. Other states are also trying to improve disclosure.

Are all agents paid the same way?
No. Some insurance companies, such as GEICO and USAA, use salaried agents. Firms such as Allstate (ALL) and State Farm use primarily "captive agents" who may be salaried or paid on commission. Either way, they sell only those companies' policies. Independent agents represent multiple carriers and can offer more choices. They collect conventional commissions from insurance companies, and they may get contingent commissions as well.

Is one kind of agent better than another?
In theory, independent agents have an edge because they're not limited to just one insurance company's products. But they may be tempted to direct consumers to companies that pay them the most. Truth is, you can get a good policy from any of the different types of insurance agents.

If contingent commissions are eliminated, will my premiums fall?
Unlikely. Pricing that's easier to understand and compare should lead to greater competition and better policies for consumers. Insurers have been paying these extra commissions in part to gain market share, however, and may decide that if they can't get business that way, they'll increase marketing budgets and pass that cost along.

Should I shop around for a new policy?
Now is a good time to sit down with your agent and review your policies. If you're looking for a new policy and are willing to do some research, work with several agents -- not just one agent who presents you with three options. The key, though, is not necessarily getting the cheapest price but the best combination of cost and coverage.

By Suzanne Woolley