NAIC seeks targeted response to compensation controversy.

State insurance regulators are struggling to find the right target as they take aim at broker-compensation practices that have become controversial in the wake of investigations and lawsuits by New York state Attorney General Eliot Spitzer and others.

A task force of the National Association of Insurance Commissioners aired a new draft on Dec. 6 of a proposed amendment to the NAIC's Producer Licensing Model Act, which would tighten requirements for producers to disclose commissions--including contingent payments--they receive from insurers.

In a session held at the NAIC's Winter National Meeting in New Orleans, a consensus appeared to be growing that one section of the amendment, which appeared likely to make the measure apply to virtually all insurance producers, should be shelved for later consideration. That would leave the focus on a narrower class of brokered business in a model that state legislatures could take up in their 2005 sessions. With that in mind, the NAICs Broker Activities Task Force was looking to have a model read), for adoption by the full membership before the end of 2004.

Regulators and industry representatives struggled, however, to find language that would limit the amendment's scope to transactions with the potential for conflicts of interest or misconduct of the sort alleged by Spitzer, which included bid-rigging and steering of business to take advantage of contingent commission agreements. An earlier draft prompted concern that it would compel disclosure in any transaction where the producer is permitted to take payment from the customer, regardless of whether any actual payment is made. The new draft imposes the commission disclosure requirements "in any insurance transaction where any insurance producer or any affiliate of such producer receives any compensation from the customer or acts on behalf of the customer." But it wasn't clear whether even the revised language would hit all of the intended targets--or leave unintended targets unscathed.

As revised, the first two sections of the amendment provide as follows:

* In any insurance transaction where an insurance producer or affiliate is paid by or acts on behalf of the customer, the producer may not take any payment related to the transaction from the insurer without first receiving the customer's acknowledgment that the payment will be made, and disclosing either the amount of the payment--including any contingent compensation--or a reasonable estimate and the method of calculation.

* An insurance producer must disclose to the customer, before the purchase of insurance, that the insurer will pay the producer; that the payment may vary by product or insurer; and whether any additional compensation may be received based on factors such as premium volume placed with a particular insurer and loss or claims experience.

A third section was added to define certain terms; among others, it defined "customer" to exclude members or beneficiaries of employee-benefit plans, people covered by group insurance or annuity products, and workers' compensation claimants.

The second section, little changed from the first draft, still was criticized as too broad, and members of the task force appeared to be leaning toward deleting it, though not abandoning it. Most of the commissioners said there was ample time to address broader disclosure issues that aren't tied to allegations of wrongdoing. "Let's rush where we need to rush," said Georgia Insurance Commissioner John Oxendine.

In the first section of the draft, the phrase "acts on behalf of the customer" produced lengthy discussion over its meaning and whether some other language would better capture the types of relationships that were of concern.

Audrey Samers of the New York State Insurance Department said that simply looking at whether the customer pays the broker isn't sufficient, because some of the allegations that have surfaced in New York involve transactions where the customer didn't pay the broker.

"I think we need to target the kinds of relationships where a promise of loyalty has been made to the customer," said Montana Insurance Commissioner John Morrison.

Some industry representatives argued that any insurance producer could be construed on some level as acting on behalf of the customer, and that many in effect work for both parties, making it difficult to draw a clear line. Bill Anderson, senior vice president of the National Association of Insurance and Financial Advisors, argued that a life agent, already faced with an "extremely difficult" sales job, would "kill the sale" by declaring loyalty to the company up front.

"Corruption and transparency are two different issues," Montana's Morrison said in urging a sharp focus on compensation arrangements that can breed misconduct such as Spitzer has alleged. The current crisis is an immediate threat to customers and to state regulation, he said, and the NAIC's action should "take that target and put a bullet right through the middle of it."