Mr. Spitzers current campaign against the insurance industry and his outrageous comments comparing the industry to organized crime are consistent with that strategy, in spite of the fact that Americas diverse network of insurers, agents and brokers is more representative of Main Street than of Wall Street.

There is considerable irony in the Spitzer-induced agitation over broker compensation. According to Mr. Spitzer and his supporters, contingent commission arrangements prevent unwitting consumers from obtaining the best available policy at the best possible price.

Their wholesale condemnation of contingent commissions has typically been accompanied by expressions of outrage over the “failure” of the insurance regulatory system to protect consumers from practices that may have caused some consumers to pay more for insurance coverage than they should have.

In fact, many requirements of the insurance regulatory system have been having that effect for years, yet few of those up in arms over broker compensation seem to notice or care.

The most glaring examples are rate regulation and government-imposed underwriting restrictions, which force low-risk consumers to subsidize the cost of providing coverage for those with higher levels of risk. Given the current enthusiasm for disclosure and transparency, perhaps regulators should disclose the surcharge that these cross-subsidies impose on low-risk policyholders.

There is also a vast array of price-inflationary regulatory practicesranging from gratuitous market conduct examinations, to burdensome rate and form filings, to the lack of uniformity among states with respect to routine administrative requirements. These rules and procedures generate enormous compliance costs for insurers that are ultimately borne by consumers in the form of higher premiums.

In addition, if the questionable practices of a few commercial brokers have driven up insurance costs for some consumers, consider the tort litigation systems devastating effect on the price consumers pay for various forms of liability insurance.

In the broad scheme of things, the negative impact on consumers wrought by these regulatory and legal requirements far outweighs the few instances of bid-rigging and possible contingent fee abuse that have become the cause du jour among some editorialists and consumerists.

That is why the National Association of Mutual Insurance Companies has renewed its support for a modernized system of state insurance regulation that protects consumers, creates uniformity, ensures competitive markets and encourages choices for the insurance-buying public. We have urged reform-minded policymakers to remain steadfast in their support of a state-based modernization agenda.

We know that wont be easy, because already the Spitzer probe has caused some to question certain elements of the modernization agenda. For example:

Rate modernization:

Unfettered price competition is the lynchpin of meaningful regulatory reform. Opponents of price competition have used the Spitzer allegations to suggest that if rating for commercial lines had not been deregulated, regulators would have been in a position to detect instances of bid-rigging.

However, the potential for bid-rigging exists across a wide range of industries. Only in insurance regulatory circles would anyone seriously suggest that the way to deter such criminal activity is through government-administered price controls.

State vs. Federal Regulation:

Proponents of an increased federal role in insurance regulation will no doubt cite the Spitzer allegations as proof of the inadequacy of state regulation. But lets not forget that the most notorious corporate scandals in recent decades have involved industries that operate under federal regulatory jurisdiction.

The savings and loan debacle of the 1980s and the more recent scandals involving the energy industry are hardly testaments to the effectiveness of federal regulation. Moreover, the targets of Mr. Spitzers own past prosecutionsinvestment banks, pharmaceutical manufacturers and mutual fund companiesare all subject to federal law and regulated by federal agencies.

Competition:

With respect to both pricing and underwriting, NAMIC has long stood for the proposition that open competition spurs insurers to provide the most innovative products and services at the fairest price for consumers. Bid-rigging clearly involves illegal collusion among competitors and merits appropriate penalties and sanctions.

Regarding contingent compensation arrangements, a rule requiring insurance brokers to clearly disclose to prospective customers whether they represent the customer, an insurer or both, would allow customers to evaluate potential conflicts of interest when choosing a broker. The transparency created by such a rule would enhance competition and therefore benefit consumers.

However, a proposed amendment to the National Association of Insurance Commissioners Producer Licensing Model Act would require a level of disclosure that is unreasonable. Producers (which includes both brokers and agents) who receive compensation from both policyholders and insurers would have to disclose the amount of any compensation from an insurer, describe the method for calculating that compensation, and provide an estimate of the amount of compensation if it is not known at the time of disclosure.

Further, the amendment would require producers who receive compensation from an insurer to disclose whether the compensation will vary depending on the product and the insurer, and also whether it will vary based on factors such as the premium volume placed with the insurer or the insurers claims experience. Does the NAIC really believe that consumers need this level of mandatory disclosure to make informed choices?

The NAICs overzealous response to the Spitzer probe comes as powerful interests in Washington are lobbying in support of a dual system of state and federal regulation. To maintain the states exclusive prerogative to regulate insurance, the NAIC and state policymakers must re-dedicate themselves to the modernization agenda that NAMIC has supported for years.

Most importantly, the state regulatory system must give up its infatuation with antiquated rate regulation. Using the Spitzer probe as an excuse to create additional layers of regulation ignores the real problems that must be addressed.

Charles M. Chamness is president and CEO of the National Association of Mutual Insurance Companies in Indianapolis.

Reproduced from National Underwriter Edition, December 16, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.