In a settlement announced yesterday, Chubb Corp, agreed to end the practice of contingent commissions with the Attorney's General of the states of NY, CT and IL. They will pay $15 million in restitution and $2 million in costs and end the practice effective January 1, 2007.
What makes this recent settlement so important is that Chubb is generally regarded in the insurance community as one of the most ethical and fair insurance companies in the world, with a long standing record of treating both it's policy holders and claimants with respect. A general agency contract or brokerage agreement to write insurance for Chubb typically takes some work and requires an agency or brokerage to have long experience in the market, along with a demonstrated ability to produce business in the luxury and upscale markets that Chubb tends to dominate. In short, a Chubb agency contract is of high value, so the disclosure that Chubb was engaged in the practice of paying brokers contingent commissions in order to keep agents and producers sending business their way is an indication of just how pervasive this practice had become in the industry.
Why this is important is that any commission or compensation that is undisclosed to the policyholder could possibly influence the choice of insurance markets for that risk, and could have the effect of steering business to a company based on how much the agent makes, as opposed to what is best for the customer. The fact that the client isn't aware that their agent is being paid more, or has a lending arrangement with the insurance company, is at the heart of the AG's complaints, and I believe those complaints are totally valid. A customer has every right to know why an agent selects a particular company to sell to that customer, and open and full disclosure of all compensation, either in cash or benefits, should be part of that package.
As i've been warning for well over a year now, the Settlement Industry is about to see similar regulations and standards imposed upon it by outside regulators or enforcement agencies, and it would be advisable for general agents and brokers to implement standards and practices that follow this model.
1. Full disclosure of all annuity quotes and markets on each settlement case. This would end the practice of post settlement underwriting and daily rate adjustments in favor of the defendants, but thats not a bad thing. It's a questionable practice and it should have ended years ago. Just as in the securities industry these quotes should all be retained in the case file for 3 to 5 years minimum.
2. Full disclosure of non-commission compensation by life markets to a general agent or agent. This is a tough one because we all like the concept of keeping our particular business arrangements with life and casualty markets to ourselves for competitive reasons. However, that was the argument of the brokers doing contingent commissions and look at who won that little wrestling match. I'd suggest that on the web site or in a disclosure form to clients that there at least be a mention of the sponsorship or marketing assistance given to companies by life and casualty markets. A voluntary disclosure program could preempt or soften the inevitable state or federal law that might be more onerous.
3. Disclosure of any sales or marketing trips of incentives provided by life markets at the time of sale. Look, we all love the trips awarded by life markets and I don't want to see them end any more then you do, but the fact is there are brokers who will send money to a life market to win a trip even if the life market isn't the best at the time they write the case. It's pretty simple to cover yourself on this one. Just disclose the sales contest, show all prices and have the client sign off on it with full disclosure.
Lets not make this harder then it has to be. That which is hidden will be found out, and the impact of "undisclosed compensation" vs disclosed compensation is huge. Put the procedures in place and clean up your business practices now, before we have to deal with excessive regulation and restrictions from those outside our business. It's not if, but when.