Todays online Wall Street Journal has an article on the announcement yesterday that Metropolitan Life had agreed to settle for $19 million with the State of NY over it's contingent commission practices on it's group life, health and disability business.
As you can read in the article, this now brings to seven the number of life companies that have been investigated by future NY State Governor Eliot Spitzer while he was AG for that state, over the question of whether or not the use of undisclosed contingent commission agreements violated consumer protection laws in the state of NY. At it's heart was the argument that the undisclosed practice created an incentive to steer business to life companies on the basis of how much the broker might be paid, as opposed to what might be the best possible price for the consumer.
As I mentioned in my earlier blog post on this topic, the practice was essentially legal, and if you read the settlements the companies have admitted to no wrong doing or criminal behavior. However, legal doesn't mean ethical, and any compensation practice that hides from the end purchaser the reason why an agent or broker is recommending a particular life insurance or annuity company is going to eventually be called into question. It could be perfectly harmless or legitimate to recommend a company that pays you more, but why not disclose up front your compensation and reasons why you are using a particular market.
My fellow blogger, John Darer, recently gave his take on the contingent commission practice, and in particular how it relates to commission practices in the structured settlement industry. Good reading and John makes some good points about how commissions are essentially level on the vast majority of structured settlement annuities written in the US. He further accurately lays out the ownership and applicant process in which the annuitant/claimant/beneficiary has no standing in the eyes of the insurance company, as the actual applicant for the annuity contract is the qualified assignment company that purchases the annuity to fund the agreed upon periodic payment stream. However, this shield, while long used by the life and annuity markets to keep plaintiffs in the dark about commission rebates, preferred markets, preferred brokers, after settlement underwriting and post settlement daily rate pricing, sounds essentially like the arguments used by Chubb, Met Life, Prudential, AIG, Zurich, St. Paul and Unum Mutual that contingent commissions weren't illegal either.
My point was, and continues to be, that while the practices mentioned above, like the practice of contingent commissions on group sales might be legal, it is an exceptionally poor business practice and it would be wise if our industry took some proactive steps and began to require in cases where the claimant is NOT represented by their own settlement professional, a full disclosure form to the claimant and the trial lawyer, at the time of sale showing the annuity bids, underwriting information, Internal Rates of Return, any sales contests offered, a confirmed annuity premium amount and their commission, along with any split deals that might be attached to it. Sure it's going to require some additional paperwork and disclosure, but wouldn't doing this, or something like it, essentially end most questionable business practices and begin to move our industry on to the same standards of disclosure and professionalism that are required of financial planners, investment advisors and trust companies?
I still contend that if we don't make changes as an industry, changes will be imposed upon us by outside agencies, and a model disclosure form would go a long way to raising the professional standards of our industry among the real decision makers on whether a structured annuity is going to be written, and that would be the claimant and their attorney, and very frequently the financial advisor trying to steer them away from a structure.
The old rule still stands. If you are afraid to disclose it for fear that it might upset the decision maker and cost you a sale, then you probably shouldn't be doing it. Lets get out of the dark ages and start doing a better job of presenting our product and ourselves as professionals.