The long battle between the New York Insurance Department and large segments of the insurance industry surrounding producer disclosure of compensation has reached its final stage as the Department announced that its regulation, over 18 months in the making, was officially promulgated last week. In the Department’s view, the regulation is designed to provide transparency by requiring brokers and agents to describe to consumers their role in the transaction and how they get paid. Further, the agent or broker then has to provide a more detailed statement about compensation, if the consumer requests it.
“This regulation will provide New Yorkers buying insurance with an important tool to use in making an informed decision,” said Superintendent James J. Wrynn. “Almost everyone buys insurance at some point, and in these difficult economic times, consumers should understand any incentives that may potentially affect the recommendations from their agents or brokers.”
The “Notice of Adoption” filed by the Department is quite lengthy and provides several details about the regulatory development process. This notice reveals that the Department did not change the regulation in a substantive way after it was originally published in the State Register. Further, an “Assessment of Public Comment” provides a detailed explanation of the types of producer compensation, but little analysis of the commentary received from the parties affected. The Assessment reads that, “the Department has considered a number of different courses of action, including (1) banning or limiting certain types of producer compensation; (2) full disclosure of all producer compensation for every insurance transaction; (3) requiring disclosure only for producers who are paid directly by the purchaser and by the insurer; (4) requiring disclosure of producer compensation only upon the request of the purchaser; (5) requiring that producers disclose only their role in the transaction and the source of their compensation with no disclosure of the compensation amount; and (6) taking no regulatory action and/or promoting voluntary disclosure of compensation by producers.” Of these options the Department writes, “After this exhaustive process, the Department has determined that this final draft regulation hereby adopted is the best way to ensure that consumers better understand the role that insurance producers play in the insurance transaction, the compensation those producers receive, and any potential conflicts of interest that may arise as a result, while imposing as little cost as necessary on the producers and insurers.”
Unfortunately, the document is silent as to why the approach taken in the final regulation is the best. It would have been helpful for all interested parties if the Department analyzed each course of action in particular, comparing and contrasting the different approaches, listing their pros and cons, and giving a more detailed explanation of why they believe final version is the best approach. Greater detail would be especially helpful given the level of antipathy for this regulation from the industry.
There is no doubt that the outreach conducted by the Department, over the past year and a half has been amongst the most extensive levels of outreach ever conducted by that agency on any matter. There is so much data submitted that the “Notice of Adoption” contains a link to the Department’s website for those who want to see it all. However, many interested parties have told me that despite the seemingly endless meetings, the public hearings, the numerous written submissions – and even the modifications to the regulation made by the Department along the way – the Department never really embraced the fundamental industry concern that the “prompt” and the actual or potential disclosure of compensation amounts could significantly damage the industry - and actually lead to less people being insured. There is an impression that the Department summarily dismissed this position. Of course, any prediction of future action is difficult to prove, empirically, and the industry experienced great difficulty in making the case for this level of damage. However, I’ve spoken to enough insurance producers from across the state to say that I believe they, almost unanimously, believe that the “prompt” and subsequent disclosure of compensation amounts would damage their business and result in many people opting not to be insured. Consumer advocates and other supporters of the regulation may have interpreted this concern as a desire on the part of producers to hide the amount of money they are making from their clients. However, I do not believe that this is correct.
Many agents have told me that this is not as much about hiding the money they are making from their clients as it is concern about the impact that such knowledge may have on a client that does not understand the relationship cost structure of the producer’s business. The agents fear that it would be too difficult to explain such a context to each client, and they wonder whether the client would even want to hear such an explanation. Thus, without knowledge of the proper context of how the agent’s business works, the actual compensation figure would appear excessive or unreasonable, when, in fact it is not. This argument has been made elsewhere in these pages all along. I don’t believe that anyone knows what the effect of this regulation will be on the insurance market. I know I don’t.
My issue with this regulation is that it has always sought to remedy ills that exist in an overall small part of the market with a regulation that applies to the entire market. In other words, the regulation does not distinguish between brokers and agents, or between independent agents and captive agents. All producers are lumped into one category. It is a “one size fits all” regulation when some “custom tailoring” was necessary. There are definitely circumstances when the amount of compensation is entirely necessary for a consumer to make an informed decision. Yet there are other circumstances when the amount of compensation is merely a “curiosity” to consumers. Well, all of the talk is now over and the regulation is now in place and its effective date is January 1, 2011. What will happen now? The gossip mill is buzzing as IIABNY announces its Article 78 action (see our cover story) to overturn the regulation and send the Department back to the drawing board. Others talk about seeking redress from the legislature. Whether or not the regulation gets overturned, I’m sure this regulation will be a topic of conversation for some time to come.
Rising Auto Insurance Rates Put No Fault Fraud at Top of Agenda
It seems as if I have attended a thousand such events. The scene is a crowded public hearing room in the well-marbled Legislative Office Building (or “LOB” to the natives). Legislators, Senators in this case, begin to arrive at the appointed hour with their staff members and take their seats at the dais above placards containing their name and title on the committee. The placards are unnecessary to most of the attendees, all representatives of insurance trade associations, companies and their government representatives, law firms, trial lawyer trade associations, industry financed information groups and Insurance Department staff. It is a group that I always have referred to as the “usual suspects”, stealing a line from Captain Renault in Casablanca. On February 4th the “usual suspects” were gathered to give information to the Senate Insurance Committee on the current state of fraud in the nofault insurance area. The meeting was called by the committee’s chairman, Neil Breslin, senator from Albany County. The hearing notice read that “during the past five years New York’s auto insurers have seen a 56 percent increase in the average cost of no-fault claims, which according to many experts is the result of fraud and abuse of the no-fault system in New York.” The notice further read, “[i]t is estimated that a significant percentage of each individuals automobile insurance premium can be contributed to insurance fraud.” The notice invites government representatives, insurance industry and advocates to come forward and speak to this issue.
The first witness was Deputy Superintendent Steve Nachman of the Insurance Department who told the Senators that the Department had been tracking a spike in no-fault fraud in the past three years. No-fault filings with the Department’s frauds bureau had decreased steadily from 2002 to 2006 to a low of around 10,000 annually. However, since 2007 such filings were on the rise to just short of 14,000 for 2009. He attributed the increase to “surges” that occur with this type of crime and to new methods undertaken by the very well-organized criminal groups who continue to innovate to attempt to stay ahead of law enforcement. He said that it was particularly troubling to learn that hospital workers were selling information about patients involved in auto accidents to the fraud “runners” who were then approaching these people to steer them into the medical and legal fraud mills. Nachman described that the Department has a “three-pronged” approach to combating the latest surge in no-fault fraud. The first prong is enhanced efforts at cooperating with prosecutors to develop and pursue cases against the organized criminals involved in these frauds. The second prong is the update to Regulation 68, which has been discussed in earlier versions of this column. The Department has posted a draft of the proposed changes on its website and has been receiving and evaluating comments. It is expected that the draft will be modified in the near future and posted again. The third prong to the attack is legislative. The Department will propose a repeal of the law which requires insurers to pay claims not denied within a 30-day window. The new law would allow the insurer to deny a claim after the 30-day period if the insurer obtains evidence that the claim was made fraudulently. Further, the Department will ask the legislature for the sole authority to decertify professionals who participate in fraudulent activities. Additionally, the Department will support mandatory arbitration and the Senator Skelos “runners” fraud bill. The scope of the problem was then outlined by Robert Hartwig, president of the Insurance Information Institute. He described the no-fault system as “out-of-control” and said that New York policyholders pay a “fraud tax” of about $1,561 or about 22% of the average nofault claim. Hartwig also said the average cost of a no-fault claim increased 55% from 2004 to 2009.
Other industry spokespersons added additional insight to the Senate inquiry. Paul Blume, Senior Vice- President of the Property Casualty Insurance Association (PCI) focused on the unique way New York handles “assignment of benefits” for no-fault claimants. Claimants in New York sign over to medical professionals their rights to pursue benefits under the law which allows those professionals to contest all issues, which results in added litigation. Gary Henning, northeast region assistant vice-president for the American Insurance Association (AIA), recommended cutting the no-fault threshold from $50,000, the highest in the country, to as low as $5,000. New York no-fault awards are amongst the highest in the nation.
In the surprise of the day, the trial lawyers disagreed with the insurance industry. Richard Binko, president of the New York State Trial Lawyers Association stated that the insurance industry is overstating the impact of fraud and is seeking remedies that would put an unfair burden on consumers and accident victims. He emphasized that fraud accounts for just 3% of insurance premiums. Assembly Insurance Chairman Joseph Morelle, (D-Irondequoit) also recently held a no-fault roundtable discussion. Thus, an issue that has laid dormant since 2002 has arisen again to become a major one for the 2010 legislative session. Given the precipitous drop in nofault incidents after the “hard-won” changes to Regulation 68 in 2002, and other enhanced anti-fraud measures instituted by the legislature and the Insurance Department during that era, why are we now seeing such a drastic increase in no-fault fraud? While the legislature has heard many thoughts and suggestions from many parties, no one has adequately explained the cause for this phenomenon. Perhaps the revitalized discussion should begin again with a focus on the underlying causes for the sharp increase. Why has a problem that we had on the run only a few short years ago come back with such a vengeance? Is it the economy? Have insurers cut resources and personnel to their special investigative units? Could there be other, yet unknown reasons for the increase? Have insurers, the courts, regulators and the overseers of the professional disciplines all, collectively, taken their “eye of the ball”, so to speak? Meaningful changes may not be possible until we have an answer to those questio
