The Senate Governmental Affairs Subcommittee on Financial Management, the Budget, and International Security, chaired by retiring Senator Peter Fitzgerald (R. IL), opened hearings yesterday into insurance brokerage practices and the adequacy of the current insurance regulatory system. New York Attorney General Eliot Spitzer was the lead-off witness at the hearings. Also testifying from the state regulatory community were Connecticut Attorney General Richard Blumenthal, New York Insurance Superintendent Gregory Serio, and California Insurance Commissioner John Garamendi. In addition, testimony on behalf of the insurance industry was heard from Albert Counselman (President and CEO of Riggs, Counselman, Michaels & Downes, Inc.), Alex Soto (President of InSource, Inc.), Ernie Csiszar (President and CEO of Property Casualty Insurers Association of America), and Janice Ochenkowski (Vice President for External Affairs, Risk and Insurance Management).
Spitzer compared his recent investigations into insurance industry practices to previous investment banking and mutual fund scandals, suggesting that the complaints against Marsh & McLennan and Universal Life Resources are merely the tip of the iceberg in what he labeled a "pandora.s box" of "remarkable corruption." Spitzer highlighted several specific concerns that he urged Congress to address, including: (1) massive insurance capital flow to offshore entities out of the reach of state regulators; (2) interlocking relationships between brokers and carriers which encourage unethical fee practices and activities; (3) lack of public understanding of the process by which insurers set their premiums; and (4) dubious ethical practices and a lack of self policing in the industry. Spitzer called for congressional action, suggesting that the federal government become involved in areas such as offshore capitalization and insurer investments. He stated, however, that Congress' efforts should not preempt state regulation (a position echoed by all members of the panel), but should focus instead on helping state officials police the industry.
Notably, other state regulators disagreed with Spitzer regarding the need for more federal government involvement in insurance industry practices. Connecticut Attorney General Richard Blumenthal testified about the need for state prosecutors to aggressively prosecute illegal and improper conduct. Blumenthal emphasized that it is state insurance laws . not federal regulation . that needs to be revamped to address these issues, and noted that "federalizing this problem is unnecessary and unwise." Similarly, New York Insurance Superintendent Gregory Serio, speaking on behalf of the NAIC and testifying on the development of model NAIC legislation to improve broker disclosure of fees arrangements, noted that Congress should be "very careful" in considering potential federal legislation. Serio emphasized that federal law should not preempt state laws in this area.
California Insurance Commissioner John Garamendi suggested that the investigations and complaints which have been publicized to date are not isolated incidents. Garamendi expressed a belief that those investigations and complaints merely mark the beginning of widespread industry scandals that he alleges are draining the economic growth of the country.
Those testifying on behalf of the insurance industry cautioned against widespread federal reform. Property Casualty Insurers Association of America President and CEO Ernie Csiszar maintained that the illegal conduct identified in recent investigations is not representative of the insurance industry as a whole, and warned the Subcommittee that an overly broad federal regulatory response could end up harming the "thousands of honest Americans working in the insurance industry." Csiszar defended the use of contingency agreements and asked the Subcommittee to keep in mind that the best way to protect the interests of consumers is by maintaining open, fair, and competitive markets, and by ensuring that agents and brokers have incentive to provide the best possible service to consumers. Other members of the industry also emphasized the key role that incentive based contingency agreements play in the insurance industry. For example, InSource, Inc. President Alex Soto called contingency agreements a "good business practice" that "rewards excellence" by creating incentives for brokers to provide good risk management.
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