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97–049 PDF 2005

S. Hrg. 108–736

OVERSIGHT HEARING ON INSURANCE BROKERAGE

PRACTICES, INCLUDING POTENTIAL CONFLICTS

OF INTEREST AND THE ADEQUACY OF THE

CURRENT REGULATORY FRAMEWORK

HEARING

BEFORE THE

FINANCIAL MANAGEMENT, THE BUDGET, AND 

INTERNATIONAL SECURITY SUBCOMMITTEE

OF THE

COMMITTEE ON 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

NOVEMBER 16, 2004

Printed for the use of the Committee on Governmental Affairs

(

(II)

COMMITTEE ON GOVERNMENTAL AFFAIRS 

SUSAN M. COLLINS, Maine, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

ARLEN SPECTER, Pennsylvania 

ROBERT F. BENNETT, Utah 

PETER G. FITZGERALD, Illinois 

JOHN E. SUNUNU, New Hampshire 

RICHARD C. SHELBY, Alabama 

JOSEPH I. LIEBERMAN, Connecticut 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

RICHARD J. DURBIN, Illinois 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

MICHAEL D. BOPP, Staff Director and Chief Counsel 

JOYCE A. RECHTSCHAFFEN, Minority Staff Director and Counsel 

AMY B. NEWHOUSE, Chief Clerk

FINANCIAL MANAGEMENT, THE BUDGET, AND INTERNATIONAL 

SECURITY SUBCOMMITTEE 

PETER G. FITZGERALD, Illinois, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

ARLEN SPECTER, Pennsylvania 

ROBERT F. BENNETT, Utah 

JOHN E. SUNUNU, New Hampshire 

RICHARD C. SHELBY, Alabama 

DANIEL K. AKAKA, Hawaii 

CARL LEVIN, Michigan 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

MICHAEL J. RUSSELL, Staff Director 

RICHARD J. KESSLER, Minority Staff Director 

NANCI E. LANGLEY, Minority Deputy Staff Director 

TARA E. BAIRD, Chief Clerk 

(III)

C O N T E N T S 

Opening statements: Page 

Senator Fitzgerald ............................................................................................ 1

Senator Akaka .................................................................................................. 24

Senator Carper ................................................................................................. 25

WITNESSES 

TUESDAY, NOVEMBER 16, 2004

Hon. Eliot L. Spitzer, Attorney General, State of New York ............................... 5

Hon. Richard Blumenthal, Attorney General, State of Connecticut ................... 8

Hon. Gregory V. Serio, Superintendent of Insurance, State of New York, 

on behalf of the National Association of Insurance Commissioners ................ 9

Hon. John Garamendi, Insurance Commissioner, State of California ................ 12

Albert R. Counselman, President and Chief Executive Officer, Riggs, 

Counselman, Michaels and Downes, Inc., on behalf of the Council of Insurance Agents and Brokers ..................................................................................... 30

Alex Soto, President, InSource, Inc., on behalf of the Independent Insurance 

Agents and Brokers of America .......................................................................... 32

Ernst N. Csiszar, President and Chief Executive Officer, Property Casualty 

Insurers Association of America ......................................................................... 34

Janice Ochenkowski, Senior Vice President, Risk Management, Jones Lang 

LaSalle, and Vice President for External Affairs, Risk and Insurance Management Society ................................................................................................... 36

J. Robert Hunter, Director of Insurance, Consumer Federation of America ...... 38

ALPHABETICAL LIST OF WITNESSES

Blumenthal, Hon. Richard: 

Testimony .......................................................................................................... 8

Prepared statement .......................................................................................... 72

Counselman, Albert R.: 

Testimony .......................................................................................................... 30

Prepared statement .......................................................................................... 96

Csiszar, Ernst N.: 

Testimony .......................................................................................................... 34

Prepared statement .......................................................................................... 115

Garamendi, Hon. John: 

Testimony .......................................................................................................... 12

Prepared statement .......................................................................................... 92

Hunter, J. Robert: 

Testimony .......................................................................................................... 38

Prepared statement .......................................................................................... 130

Ochenkowski, Janice: 

Testimony .......................................................................................................... 36

Prepared statement .......................................................................................... 123

Serio, Hon. Gregory V.: 

Testimony .......................................................................................................... 9

Prepared statement .......................................................................................... 77

Soto, Alex: 

Testimony .......................................................................................................... 32

Prepared statement .......................................................................................... 107

Spitzer, Hon. Eliot L.: 

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 55

Page

IV

APPENDIX 

American Insurance Association, prepared statement ......................................... 148

The Insurance Marketplace Standards Association (IMSA), prepared statement ...................................................................................................................... 150

The National Associaiton of Professional Insurance Agents, prepared statement ...................................................................................................................... 153

(1)

OVERSIGHT HEARING ON INSURANCE 

BROKERAGE PRACTICES, INCLUDING 

POTENTIAL CONFLICTS OF INTEREST 

AND THE ADEQUACY OF THE CURRENT 

REGULATORY FRAMEWORK 

TUESDAY, NOVEMBER 16, 2004

U.S. SENATE, SUBCOMMITTEE ON FINANCIAL MANAGEMENT, THE BUDGET, AND INTERNATIONAL SECURITY, OF THE COMMITTEE ON GOVERNMENTAL AFFAIRS, Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:32 a.m., in 

room SD–342, Dirksen Senate Office Building, Hon. Peter G. Fitzgerald, Chairman of the Subcommittee, presiding. 

Present: Senators Fitzgerald, Akaka, and Carper. 

OPENING STATEMENT OF SENATOR FITZGERALD 

Senator FITZGERALD. This meeting will come to order. I would 

like to advise the panelists and the audience that the Democratic 

Senate Caucus has just called a meeting at 10:30 and so Senator 

Akaka will be somewhat delayed, but he intends to come here 

later. 

Today, I conduct my final oversight hearing as a U.S. Senator 

and the hearing is on the growing controversy surrounding insurance brokerage practices and the impact of these practices on the 

consumer. I would like to welcome the distinguished witnesses we 

have with us today and thank them for taking the time out of their 

busy schedules to share their perspectives. 

Today, we consider allegations that some insurance brokers hired 

and paid by their clients to represent them in procuring insurance 

suited to their needs have instead steered their clients to the insurers who are paying so-called contingent commissions, that is, commissions above and beyond their direct commissions that are based 

on volume or profitability of insurance business. In some cases, according to Attorney General Eliot Spitzer’s lawsuit and the guilty 

pleas of certain broker executives, some broker employees have 

apparently even engaged in criminal bid rigging and price fixing. 

Everyone inside and outside the insurance industry condemns the 

criminal conduct and calls for its vigorous prosecution and punishment. 

This oversight hearing breaks no new or interesting ground with 

respect to criminal bid rigging or price fixing. We do, however, 

critically examine the compensation structure of insurance brokerVerDate 0ct 09 2002 09:03 Jan 07, 2005 Jkt 097049 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 C:\DOCS\97049.TXT SAFFAIRS PsN: PHOGAN
2

age and we ask whether that structure poses unacceptable conflicts 

of interest and whether our current regulatory system is equipped 

to tackle that question with due regard for both free and fair markets. 

My study of this insurance brokerage controversy convinces me 

that there is a Federal role, the time-honored Federal role that 

guarantees competition and fights the mischief of undue market 

concentration. 

Contingent commission arrangements have been common and 

legal for decades. I believe it is no coincidence that the controversy 

of these compensation arrangements tracks the increasing consolidation of the brokerage market, especially the market for large corporate buyers. I believe it is no coincidence that Attorney General 

Spitzer first sued the largest market player in insurance brokerage, 

and I believe it is no coincidence that when Attorney General 

Spitzer first investigated contingent commissions pursuant to his 

powers under New York’s Donnelly and Martin Acts, he appears to 

have discovered anti-competitive and even criminal abuses orchestrated not just by any random insurance broker, but by an insurance broker that controlled 40 percent of its target market. 

By itself, an ordinary contingent commission seems unlikely to 

harm consumers or competition. Indeed, a broker who favored an 

inferior insurer merely because that insurer paid contingent commissions would quickly find itself swamped by competitors eager to 

provide a superior service to the broker’s ill-served clients. 

But that, of course, presupposes competition. What if insurance 

buyers with global insurance needs had little choice in selecting a 

broker? And what if insurers seeking global expansion of their 

business had little choice in accommodating a broker? In short, 

what if one or two global insurance brokers constituted a market 

bottleneck? 

On the face of it, contingent commissions raise the specter of a 

conflict of interest. In any given instance of advising a client to 

purchase insurance from a particular insurer, has the broker provided that advice because it is in the best interest of its client or 

because the broker will be better compensated by this particular insurer under a contingent commission arrangement? 

I believe it is mistaken, however, to look at contingent commission agreements in the abstract and draw sweeping conclusions 

from what first appears to be a misdirected incentive. Sales forces 

in many healthy, competitive industries enjoy incentive compensation or some form of profit sharing. The operative question should 

not be, could an unscrupulous broker theoretically steer business to 

an insurer despite the interest of its client and based on self-interest alone? The operative question should be, could a broker or a 

dominant group of brokers consistently get away with steering 

business to an insurer despite the interest of its client and based 

on self-interest alone? 

If we answer the former question yes, then we have a breach of 

contract or perhaps a tort claim. If we answer the latter question 

yes, then we have a failure of competition. For failures of competition, our soundest antidote is antitrust law. 

For nearly 60 years, since enactment of the McCarran-Ferguson 

Act of 1945, regulation of the business of insurance has been deleVerDate 0ct 09 2002 09:03 Jan 07, 2005 Jkt 097049 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 C:\DOCS\97049.TXT SAFFAIRS PsN: PHOGAN
3

gated entirely to the States. The system of State regulation has 

worked well for many purposes, but State regulation purporting to 

govern global conduct may not always perfectly detect the abuses 

of daunting market power. 

I believe it is time for Congress to revisit the antitrust exemption 

of the McCarran-Ferguson Act with respect to insurance brokerage 

and to make clear that vigorous Federal antitrust enforcement can 

and will reach the kind of anti-competitive conduct on the part of 

insurance brokers alleged in Attorney General Spitzer’s lawsuit. 

Furthermore, I see no continuing reason to shackle the Federal 

Trade Commission with an antiquated prohibition on even the 

mere study of the insurance industry. Until 1980, the Federal 

Trade Commission was empowered to study the industry and make 

policy recommendations. That year, Congress took away even that 

modest authority. The FTC enforces antitrust laws, among other 

charges. Declaring the FTC categorically unsuited even to peer at 

the insurance industry ignores the reality of national, indeed global, insurance markets, increasing consolidation in some market 

segments, and surges of centralized coercion that may not readily 

appear on the regulatory radar of any single State. 

If we profess to favor free markets and robust competition, then 

we must equally favor their civilizing predicates, antitrust law and 

transparency. Healthy markets thrive on sunshine, and it has certainly been said of these contingent commission arrangements in 

insurance brokerage that disclosure is woefully inadequate. 

We hear numerous calls for better disclosure of these compensation arrangements. But I will be especially interested in hearing 

from the witnesses exactly what form they propose for this better 

disclosure, and more fundamentally, whether disclosure alone is 

adequate to counter market concentration. Put another way, for 

those witnesses who promote greater disclosure as an adequate fix 

for this brokerage controversy, would you likewise support vigorous 

enforcement of Federal antitrust law to counter the leveraging of 

market domination? 

I believe that transparency is an important and salutary measure. Depending on its form and content, it may be more than we 

need in markets that are competitive. But in markets that are not 

competitive, mere disclosure of a practice that a dominant company 

can demand may not be enough. 

This oversight hearing occurs at an interesting time, not only because certain insurance brokerage practices have come under fire, 

but because Congress is increasingly focused on insurance reform. 

I will be interested in hearing the views of the witnesses as to 

whether they believe that this brokerage controversy lends more or 

less support to the optional Federal charter proposal, which would 

put insurance companies on a footing similar to banks in the ability to choose either State or Federal regulation. 

And I will be interested in hearing the views of the witnesses as 

to whether this brokerage controversy lends more or less support 

to the proposal developed by the leadership of the House Financial 

Services Committee, the State Modernization and Regulatory 

Transparency Act, or SMART Act, a draft of which has been circulated by Chairman Oxley and Capital Markets Subcommittee 

Chairman Baker. The House Financial Services Committee has 

4

conducted 16 hearings on insurance reform since the Committee’s 

organization in January 2001 and I applaud the hard work of 

Chairman Oxley and Congressman Baker in this area. 

At this point, I will save my introduction of Senator Akaka for 

later when he arrives and I would like to proceed directly to our 

first panel of witnesses. 

Our first witness is the Hon. Eliot L. Spitzer, the 63rd Attorney 

General for the State of New York. Mr. Spitzer testified previously 

before this Subcommittee on mutual fund reform and we welcome 

you back here today. By the way, after you testified here, some of 

the larger mutual fund complexes, as you may have noticed, lowered their fees, at least on indexed funds, sometimes by four to five 

times, so congratulations. I think you had a significant effect that 

went well beyond your complaints. 

On October 14, 2004, Attorney General Spitzer filed a civil suit 

against Marsh and McLennan Companies for alleged violation of 

State law regarding the companies’ compensation arrangements. 

That same day, he also filed criminal actions against specific individuals in the insurance brokerage industry. Last Friday, November 12, Attorney General Spitzer filed a second civil suit against a 

California broker, Universal Life Resources, alleging that Universal 

accepted so-called override fees from insurers to steer business to 

them. 

Our second witness is the Hon. Richard Blumenthal, Attorney 

General for the State of Connecticut. Attorney General Blumenthal 

has launched an investigation into insurance broker commissions 

and is seeking new State laws in this area. He was first elected to 

serve as Connecticut’s 23rd Attorney General in 1990 and is currently serving an unprecedented fourth term. Prior to being elected 

Attorney General, Mr. Blumenthal served in both the Connecticut 

State Senate and the House of Representatives. Mr. Blumenthal 

also served as U.S. Attorney for Connecticut from 1977 to 1981. 

Our third witness is the Hon. Gregory Serio, Superintendent of 

Insurance for the State of New York. He is here today to represent 

the National Association of Insurance Commissioners, known as 

NAIC. As New York Superintendent of Insurance, Mr. Serio is responsible for the monitoring and regulation of more than 1,000 insurance companies, with total assets exceeding $2 trillion. Mr. 

Serio previously served as First Deputy Superintendent and General Counsel of the New York Insurance Department and is Chief 

Counsel to the New York Senate Standing Committee on Insurance. 

Our fourth witness is the Hon. John Garamendi, Insurance Commissioner for the State of California. Mr. Garamendi was first 

elected as Insurance Commissioner in 1991. He successfully implemented Proposition 103, which put into place a major reform of the 

auto and homeowners’ insurance industry in California. In 1995, 

President Clinton appointed Mr. Garamendi as Deputy Secretary 

at the U.S. Department of the Interior. He was elected to a second 

term—I guess you came back and were elected to a second term as 

California’s Insurance Commissioner in 2003, and last month, he 

proposed regulations that would require disclosure of certain financial incentives received by insurance agents and brokers. 

5

1The prepared statement of Mr. Spitzer appears in the Appendix on page 55. 

Again, I would like to thank you for being here to testify. Mr. 

Garamendi traveled for 5 hours to get here, all the way from the 

Golden State, and we know it takes a lot of time to come to Washington to testify. We appreciate it. 

In the interest of time, we will include your full statements in 

the record and we would appreciate it if you could limit your opening remarks to 5 minutes. We will have a light that is at your table 

that will kind of keep track of the time. 

Attorney General Spitzer, welcome again to the Subcommittee. 

We really appreciate your help and I compliment you on the outstanding job you have been doing. You have been breaking new 

ground in many different areas and I admire your courage and tenacity. So thank you for coming before us. 

TESTIMONY OF HON. ELIOT L. SPITZER,1 ATTORNEY GENERAL, 

STATE OF NEW YORK 

Mr. SPITZER. Mr. Chairman, thank you very much for your kind 

words, and in particular, thank you for your leadership on these 

issues. They have not always been easy issues, but you have played 

a unique role in leading Senate inquiries into critically important 

areas in the financial services sector and I am tempted just to 

adopt your statement as my statement and then leave it at that. 

It was right on point, in particular your statements about 

McCarran-Ferguson, the FTC, and the need for Congressional inquiry. I will get there in a moment. 

To quote but amend Yogi Berra, this is deja vu all over again one 

more time. This is the third time we have seen the same story. We 

saw it with analysts at the investment banks. We saw it with mutual funds. Now we see it with the insurance industry. There are 

common elements to each of these three stories and I will very 

quickly run through them. 

In each instance, we have seen the financial services sector incapable of resisting a conflict of interest. In every instance, it has 

capitalized on that to the detriment of those to whom it owed a 

duty of care. Indeed, at one point, we all know the famous comment from one Wall Street analyst who said what used to be 

viewed as a conflict of interest is now viewed as a synergy and they 

simply do not understand the difference. 

Second, in each instance, each of these three story lines, there 

has been an abject failure of self-regulation. Nobody came forward 

to say there is a problem, there is an issue with respect to steering, 

bid rigging, conflict of interest that run deep in the industry, just 

as nobody came forward with analysts or mutual fund scandals. 

Third, there has been a failure of the regulatory entities that are 

supposed to oversee the sector. They failed to ask even obvious 

questions that would have revealed deep-seated problems. 

Fourth, we have had continuing claims of purity and excessive 

regulation, and indeed claims of intense competition from industry 

leaders up until the point that the allegations were leveled. 

And finally, we had dramatic mea culpas only once they were 

caught. 

6

This is a story line which would be tiresome and grow wearisome 

over time. Indeed, we have seen it in other sectors, as well, most 

notably the pharmaceutical sector, but since we are here to discuss 

financial services, I will not verge into that. 

Let me describe very quickly the sequence of our—the progression of our inquiry, and it began with simply a letter which notified 

us that there were PSAs, MSAs, contingent fees which are, as you 

said, Mr. Chairman, not in and of themselves improper. But given 

the magnitude of these fees, we simply made an open-ended inquiry to Marsh and McLennan and asked them, how do you ensure 

that these fees do not taint the decisionmaking that you endeavor 

to make on behalf of your clients? 

We were told two things. First, there is adequate disclosure. And 

second, there is no information flow within the company such that 

the front-line brokers who were making the decisions about what 

products to recommend don’t even know what the contingent fees 

are, and therefore, we were told, they cannot be influenced. 

We learned very quickly that the claim of adequate disclosure 

was simply false. The disclosures that are made are not only grossly inadequate, they are often misleading, and indeed the companies, and I say that plural, intentionally make it difficult for their 

clients to find out what MSAs, PSAs, or overrides are paid because 

they do not want that information to be made available. 

We went back to the company and said, give us more information. They said, well, nonetheless, even if the disclosure is not adequate, there is no information flow, and, of course, we found out 

very quickly not only was it impossible to cabin information relating to an $800 million revenue flow within the company, but there 

were specific instructions to the brokers to steer business based 

upon the magnitude and the relative value of the override payments and contingencies. 

We dug even further and we were told by the company in response, well, maybe there is steering, but there is no steering to 

detriment, a comment that seems blatantly contradictory on its 

face. If you are steering, it is necessarily steering to detriment. We 

then said to them, how can that be, and they said, well, only if 

there are identical proposals for an individual client would we 

choose based upon the MSA, and we said that is somewhat ridiculous, and indeed it is. 

We then dug further, asking the last logical question, because, of 

course, if I have a fiduciary duty to a client, I don’t want that client 

to see different bids in the file and to have the client see that I am 

not picking the best bid. So necessarily, then, you begin to act in 

a way to ensure that only the bids you want end up in the file. And 

so we inquired of the carriers, do you have any information for us 

that would indicate bid rigging in the system? Forty-eight hours 

after we served that interrogatory on the carriers, lo and behold, 

our phone started ringing and we were the recipients of remarkable information about the bid rigging scandal that we have seen 

as a consequence. 

There is liability that extends to brokers. There is liability that 

extends to carriers, civil and criminal. As you said, there have been 

criminal pleas entered. There will be more criminal pleas entered 

very shortly, perhaps as early as today, from another carrier. That 

7

is ongoing as we speak. And we are finding undisclosed relationships that clients simply would be appalled to understand if they 

had ever been told. 

The impact on our markets is enormous. The insurance sector is 

vast. The numbers are laid out in my testimony. And it has indeed 

become part of our political discourse over the past few years that 

the impact of rising premiums has been a tremendous drain and 

disincentive for the creativity of our capital markets and businesses 

in general. 

Unfortunately, we have not heard that one of the reasons the 

premiums have been rising has been the collusive behavior, illegal 

behavior, of brokers and carriers, behavior that they understood 

that they simply refused to detail to the public. 

Let me say, Mr. Chairman, I think there are four discrete areas 

where Congressional inquiry would be terribly useful, inquiry that 

is necessary for Congress to undertake, because frankly, I think 

only Congress has the capacity to reach the subpoena power to 

really delve fully into the breadth and scope of the issues before us. 

With all due respect to my fellow regulators at the State level who 

have done, in many ways, a very good job, these are issues that 

Congress must begin to inquire into. 

The first area relates to the massive insurance capital flow to offshore vendors. Why is it that suddenly Bermuda is the home to so 

many insurance carriers, reinsurance carriers, brokers? Why have 

we seen such massive capital outflow from the United States, 

where there is regulatory authority for the States to exercise, to 

venues where the insurance carriers, the reinsurance carriers, and 

the brokers intentionally secrete themselves in ways and in areas 

that we cannot inquire into? There is, I would suspect, a Pandora’s 

box that should be opened so we can understand what is going on 

in these offshore venues. It will not be a pretty picture. 

Second, we need to scrutinize the wide-ranging interlocking relationships that have been revealed just from our superficial inquiry 

among brokers, insurance carriers, reinsurance carriers, reinsurance brokers. There is a multi-layered stream of income that flows 

to these companies, often with common ownership, that is simply 

not understood, that is not revealed, that has every indication of 

being corrupt and anti-competitive. It is an ugly picture. 

Third, how are premiums being set? We hear much that is said 

about their huge losses. We see premiums spike. But I don’t think 

we really understand the true finances of these companies. Part of 

the reason is they have secreted assets overseas. They have hidden 

them offshore. It is about time that we get accountability. The only 

way is to delve into, in a much more serious way than has ever 

been done, the way they set their fees. 

Finally and fourth, I would suggest that there should be a fundamental inquiry into the ethics of an industry that needs to be fundamentally scrutinized. Just as has been the case with every other 

scandal that has come before us, the failure of this industry at any 

point to put up its hand and say, we have a problem, their willing, 

rapid descent to the lowest common denominator of behavior that 

is criminal, violates common decency, is appalling. This is an industry that has for years claimed purity. Once again, we are seeing 

8

1The prepared statement of Mr. Blumenthal appears in the Appendix on page 72. 

that the more profound their claims of purity, the more profound 

the heinous behavior we find. Thank you very much. 

Senator FITZGERALD. Thank you, Mr. Spitzer. Mr. Blumenthal. 

TESTIMONY OF HON. RICHARD BLUMENTHAL,1 ATTORNEY 

GENERAL, STATE OF CONNECTICUT 

Mr. BLUMENTHAL. Thank you, Mr. Chairman. I would like to join 

General Spitzer in thanking you for your leadership, your courage, 

and your tenacity as a leader of this Subcommittee and I am chagrined to hear that we are at your last hearing, but I hope it is 

a meaningful one and I know that your leadership will be much appreciated in this body. 

I would like to thank my fellow panelists, most particularly General Spitzer for his leadership in this area. Each of them has 

played a role and I am honored to be with them on this panel. 

In Connecticut, we have an investigation that is separate and 

distinct, has involved some 43 subpoenas beginning in October. 

Even earlier, we issued letters of inquiry. The scale and magnitude 

of corrupt practices and unethical conduct continue to mount. Increasing evidence of those practices certainly means that fundamental reform is necessary, more than simply disclosure, as you 

quite rightly suggest. 

The evidence of illegal and harmful conduct, harmful not just to 

individual consumers but to our entire economy, mandates that we 

act decisively and dramatically to restore the credibility and trust 

in this industry and in the regulators who have a responsibility to 

oversee and scrutinize it. What we have seen in our investigation 

is evidence of bid rigging, fraudulent concealed commissions, secret 

payoffs, and conflicts of interest, all stifling competition and inflating the cost to consumers as well as businesses. 

There will be a barrage of well-aimed, powerful State enforcement actions. They will involve more than one State. We are now 

seeing a multi-State response to this crisis, and even as we speak, 

there is communication and growing cooperation among those 

States to address this problem. 

Our aim is to pursue these actions promptly and aggressively, 

not to be diverted by any voluntary changes on the part of the industry, but uncover all the wrongdoing and recover ill-gotten gains 

for consumers. Restitution is a vital objective. 

But reform is also an important goal and I want to be very 

straightforward with this Subcommittee. I welcome the idea of 

changing Federal antitrust laws so as to enable and encourage Federal enforcers to play a greater role and I welcome the inquiry that 

the Congress may make in regard to the areas that have been concealed. But I would strongly resist, indeed, the States will fiercely 

fight, any effort to preempt them or supplant them or prevent them 

from protecting their consumers. Antitrust has been traditionally a 

strong and vital role for the States. Consumer protection in the insurance industry has been traditionally and historically a State responsibility. And so while we may fervently hope for cooperation, 

we would fiercely fight any preemption. 

9

1The prepared statement of Mr. Serio appears in the Appendix on page 77. 

On the other hand, while federalizing the problem is not a solution, States must reform their own houses and stronger State laws 

are necessary. I want to commend Insurance Commissioner 

Garamendi for his leadership in this area, and my testimony sets 

forth some very specific proposals that go beyond disclosure, although they focus also on disclosure, full and complete disclosure, 

when a broker, for example, is compensated by both the insured 

and the insurer. 

I believe there must be consumer choice to have a broker represent him exclusively. There must be a code of ethics that is binding. There must be other reforms that mandate better practices, 

forbid conflicts of interest and provide the policing and resource authority that is necessary. 

So I think that State insurance laws must be reinvigorated and 

reinvented so that they are real agents of reform and insurance 

commissioners cease to be captives of the industry as they have 

been all too often in the history of insurance regulation. 

Federalizing the problem may not be a solution, but the States 

must do a better job in protecting consumers. I welcome this opportunity and hope that it is the beginning of a constructive dialogue 

between the States and the Congress on this subject. Thank you 

very much. 

Senator FITZGERALD. Thank you, Mr. Blumenthal. Mr. Serio. 

TESTIMONY OF HON. GREGORY V. SERIO,1 SUPERINTENDENT 

OF INSURANCE, STATE OF NEW YORK, ON BEHALF OF THE 

NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS 

Mr. SERIO. Mr. Chairman, thank you. The events of the past 

month have shone a bright and rather unflattering light upon the 

insurance industry. Compensation arrangements that smack of bid 

rigging, of steering, of favoritism are wrong and they have always 

been wrong. The industry has tried to split legal hairs to say that 

alternative compensation arrangements are lawful, but they seem 

to miss the point when they do that. There are serious endemic 

problems inside the industry that have only now been uncovered. 

The use of PSAs, MSAs, and other contingency arrangements 

and how they have been used in insurance brokering for overtly or 

implicitly influencing basic insurance transactions for the benefits 

of the broker and/or the insurer and to the detriment of the insured 

is wrong and has always been wrong. Failing to disclose these arrangements to commercial buyers only makes that matter that 

much worse. 

For brokers and carriers, the test was and always is a straightforward one. Have they acted in the best interest of the consumer, 

or could their acts be seen to constitute a conflict of interest? 

Frankly, putting it more bluntly, we would ask, would the consumer of the insurance product object to the fees and the additional 

costs if they knew about them, and would they object if they knew 

that the compensation arrangement figured prominently into the 

recommendation to make a certain placement? 

This test, applicable to virtually every broker-driven insurance 

transaction, is particularly crucial to the integrity of the insurance 

10

transactions that take place at supposedly sophisticated levels 

where by law there has been minimal regulatory authority or legal 

standards defining the four corners of the transaction. Yet time 

and again, brokers and carriers both ignored the test, thereby ignoring the best interests of the insurance buyer. 

The insidious nature of the transgressions, together with an apparent ‘‘go along to get along’’ attitude on the part of the carriers 

and even some buyers has turned the legal actions taken so far 

into a rocket fuel for changing the course of public policy. Brokers 

and insurers are even racing to disavow PSAs. At this point in 

time, though, we are not satisfied with simply undoing the inappropriate behavior. We want to take the opportunity to effectuate real 

and meaningful change and improve the integrity of the market 

and better protect all consumers at all levels of sophistication. 

This industry has earned a sweeping reform, whether through 

legal and regulatory action taken so far or future legislative action. 

And frankly, the professional insurance buyers have also earned 

some of the reforms that will be coming down the road. 

The NAIC, which has spearheaded a multi-year effort to 

uniformize rules for the licensing and regulating of brokers, proposed a new rule for the disclosure of all compensation the producer receives from an insurer in the placing of business. Furthermore, to make certain that insurance buyers are indeed active participants in the insurance transaction, the NAIC proposed that 

buyers provide written consent for the producer to receive any contingent compensation. The NAIC is also coordinating a nationwide 

information network for people to provide online tips to the insurance commissioners around the country to register complaints regarding broker activities. 

The NAIC’s member insurance departments discipline brokers 

and agents every day for violating the respective duties they owe 

to their clients. The regulatory actions are taken after investigations, are usually started with a complaint, are usually from insured or from information gained from tips or from information 

gained during other regulatory activities. 

The specific actions taken in New York over the past month by 

the Insurance Department relating specifically to broker compensation, the citing of 15 separate Marsh entities and the flagging of 

all licenses associated with Marsh, the citing of ULR and its principal, and the expected increase in regulatory activity over the coming weeks arose out of the collaborative efforts between the New 

York Insurance Department and the New York Attorney General. 

This matter originated with a single and specified complaint to the 

Department by a carrier and accelerated into the investigation it 

is today through the filing of very specific complaints by others 

with the Attorney General. 

In fact, I have to agree with the Attorney General that the industry has not been forthcoming on providing specific information 

about these problems. Indeed, we had to take what would be called 

the slow road to our examination, our early examination into the 

use of PSAs because the very complainant who brought an initial 

complaint to us, a competitor in the marketplace, failed to provide 

the Department with the kind of information that would have led 

us down this path. 

11

It has been because of the Attorney General’s powers as the chief 

law enforcement officer of the State as the appropriate lead agency 

on this matter, given his broader legal powers, his greater investigative resources, and frankly, his tireless pursuit of cases of this 

nature, and the Department has been in every respect a full collaborator on this and on many other matters that we have undertaken jointly over the past several years. 

The State regulatory system, insurance regulators and law enforcement together, have worked to reveal these problems in the 

marketplace. Though people will still be tempted to declare this a 

crisis of regulation or to declare an acute need for wholesale Federal intervention in the regulation of insurance, these should be 

avoided as the only responses for these reasons. 

The insurance industry, as the preceding speakers have said, 

more than regulation itself, needs modernization. An industry that 

does not provide a written contract at the time risks are bound 

needs to be modernized. An industry whose executives are afraid 

to sign certifications stating that their regulatory filings comply 

with the law needs to be modernized. An industry that has sought 

Federal legislation as much to escape regulation as to improve its 

own efficiency and efficacy needs to be modernized. And certainly 

an industry that finds itself facing questions of fundamental fairness in its treatment of customers needs to be modernized, no matter how small or compartmentalized the problem may seem to be. 

I agree with Attorney General Spitzer that it is not a small or compartmentalized problem at all. 

The modernization will come from the legal and regulatory actions now being taken. It will come from the NAIC. It will come 

from Commissioner Garamendi and our colleagues at the NAIC. 

And the Congress’ own deliberations on SMART, which has been 

moving, to provide uniformity of rules across State lines will also 

be an important component of this. 

The Congress’ recent work in the area of military sales of life insurance could well provide a workable model of joint Federal-State 

regulation. Federal declarations of the authority of State insurance 

departments to regulate insurance sales, together with oversight, is 

a good way to go about this. 

Much of the modernization, though, will still have to come from 

the industry itself. I noted to the Senate Banking Committee back 

in September that Federal regulation has not been the missing link 

in the efforts to modernize insurance. Rather, the absence of an industry-wide self-regulating mechanism promoting the highest and 

best standards on corporate governance, market conduct, and financial safety and soundness represents a significant hole in the 

insurance regulatory construct. 

Creation of an industry compliance model is a priority. Taking 

the steps within property casualty that were taken by the life industry after the illustration scandals of the early 1990’s is an imperative. Joining in a property casualty industry-wide organization 

is overdue. Acceptance of a 21st Century regulatory structure allowing State regulators to peer beyond the four corners of regulated entities into the 21st Century corporate structures that own 

or control these regulated entities will be the first measure of good 

faith that the industry can exercise to let us know that they are 

12

1The prepared statement of Mr. Garamendi appears in the Appendix on page 92. 

serious about putting the current matter behind them and taking 

some personal responsibility for how they operate as corporate citizens in the months and years ahead. 

I look forward to your questions. 

Senator FITZGERALD. Thank you very much. Mr. Garamendi. 

TESTIMONY OF HON. JOHN GARAMENDI,1 INSURANCE 

COMMISSIONER, STATE OF CALIFORNIA 

Mr. GARAMENDI. Thank you very much, Mr. Chairman, for the 

invitation to appear. This hearing is extremely important. You 

have my written testimony. I will summarize it and add a few additional comments. 

There has been much discussion in recent weeks, particularly 

since the election, about values, about morality. It is rather narrowly defined. Unfortunately, we are faced with a situation here of 

values. We are faced with a situation of ethics. And above all else, 

just flat out greed. It has to be addressed. 

This issue is not new, as Attorney General Spitzer pointed out 

in his opening remarks. It is found pervasively throughout corporate America. This country, this economy will not prosper and 

will not move forward if there is no trust in the basic systems that 

we must have. So we must go further. 

I don’t know where this is going to end up. We are in the opening 

pages of a very long and sordid chapter in America’s corporate life 

and we have to change it. We absolutely must. Otherwise, we are 

going to have a series of problems. We simply cannot have economic growth without a sound, viable, readily available, competitive and fair insurance system. It is one of the fundamental building blocks of economic systems and particularly the American system. 

We will, in California, continue our investigations, both with the 

Department of Insurance effort of investigating. We will be bringing lawsuits against numerous brokers as well as insurance companies. Those are underway. Those will be coordinated with other 

States. We are already coordinating with the New York Department as well as Attorney General Spitzer and we will see much 

more coordination among many departments of insurance across 

the Nation as well as Attorney Generals. 

You will have over 100 investigative agencies on this issue. All 

the various departments of insurance, 50 of them, plus a couple of 

districts—one district and some territories will be engaged, and Attorney Generals. That is a very formidable enforcement action that 

will take place, and I suppose that eventually the Federal agencies 

will wake up and get at it, also. 

In California, beyond the investigation, we have the lawsuits 

that we will be pursuing. We are also pursuing a very vigorous effort to rewrite our regulations. This is not going to require new 

law. The laws have been in place for a long time. They basically 

say that a broker owes its allegiance to the consumer, to the customer, whether that be mom and pop on the corner or in the home 

or a major corporation. It is that breach of fiduciary responsibility 

that is at the heart of this problem. 

13

To better illuminate and to provide a bright line, in California, 

we are writing new regulations to do just that, to illuminate and 

to clarify, and I will very briefly go through that for your use here 

at the Federal level. This particular regulation is becoming the 

starting point for the National Association of Insurance Commissioners to develop a draft model law or regulation as may be required by the various States, and that process is moving along very 

swiftly and I would expect it to be completed at the December 

meeting of the NAIC. 

So here is what we propose to do in the regulatory process. The 

intent of it, and the language follows along, is to require disclosure 

of all compensation a broker receives from any party, including an 

insurer, in connection with the placement of insurance on behalf of 

a client. Pretty simple, should have been done, hasn’t been done. 

Second, to prohibit a broker from putting his own financial interests ahead of a client’s by, for example, failing to obtain quotes for 

insurance from a reasonable number of insurers able to meet the 

client’s needs because the broker has an agreement to receive compensation from other insurance or from a specific insurer. 

Third, failing to present an offer for an insurer to be able to meet 

the client’s needs because the broker has an agreement, MSA or a 

contingency commission. And fourth, recommending that a client 

accept an offer from an insurer because a broker has an agreement 

to receive compensation from that insurer when another insurer 

has made a superior offer. 

It would seem to be that these would be uncontroversial and 

should not be imposed by anybody. It is simply a matter of fairness, competition, and open markets. As I have said, I believe that 

there has been a need to clarify. Yet, you are going to hear from 

the industry objections and I want to respond to those objections 

right here and tell them they are going to have a big fight. 

First, the objections are these. With respect to the disclosure of 

the amount of commissions, brokers and agents will ask, well, why 

should we have to disclose the amount of the commissions? Most 

salespeople in other industries, they don’t say what their commissions are, and they don’t say where they are getting their money. 

The answer is this. Buying insurance isn’t like buying groceries. It 

is not like buying a car. Security brokers and real estate brokers 

are required to disclose the sources and insurance salespersons and 

brokers should, also. 

Second, you are going to hear, why do these only apply to brokers? Why not to agents? The answer is fairly simple. Agents have 

a specific—they work for the insurance company. They don’t work 

for the customer. 

Third, you are going to hear that how could we disclose the 

amount when we really don’t know what it is going to be, because, 

after all, these are contingencies. Well, make a good guess to fully 

disclose everything you know. Even though it may not be totally accurate, at least the customer will know where you are getting your 

money. 

And finally, and this is probably going to be the biggest fight 

that we are going to have, brokers and agents will complain, oh 

my, you are imposing an impossible obligation on us. You are asking us to tell the customer what is suitable or what is the best 

14

available option and there are too many factors for us to do that. 

These are supposed to be professionals. These are supposed to be 

people that know the market. And to simply be able to apply their 

judgment, their best judgment, is not an impossible task and they 

are not going to face any more lawsuits in this area than they 

would in some—and that they already might, and certainly by not 

disclosing and by steering, they are facing some very serious lawsuits. 

We are not holding the broker to an obligation to find the very 

best policy, but rather it is the broker’s duty to take all reasonable 

steps to determine the client’s needs, to use its expertise in the 

best manner possible, and to make a recommendation based upon 

their experience and knowledge, and to keep their finger off the 

scale. That is what this is all about. It is about ethics and it is 

about fiduciary responsibilities. 

Thank you, Mr. Chairman. 

Senator FITZGERALD. Well, thank you all very much. I want to 

begin by following up with Mr. Garamendi’s discussion of fiduciary 

responsibilities. Isn’t one of the problems here that under the laws 

in most States, insurance brokers aren’t actually treated as fiduciaries? In fact, my understanding of New York law is that they are 

not fiduciaries typically and that the courts, New York courts, have 

held that insurance brokers are actually—they are not even professionals, they are mere order takers and it is only when they engage 

in certain types of conduct where they can rise to the level of fiduciaries and owe their clients fiduciary duties. 

I think Mr. Spitzer’s complaint in the Marsh vs. McLennan case 

is careful to cite all the advertising that Marsh and McLennan had 

done in which they are advertising how they are going to serve the 

client and they are going to try and get the best deal for the client, 

and you find the duty arising out of some of their statements. I believe they probably did develop a fiduciary duty with those statements that they make. 

But shouldn’t consumers around the country be on guard that 

their insurance agent is not like their lawyer, who owes them a fiduciary duty? It is not like the trustee or the trust department at 

the local bank, which has a duty to avoid conflicts and has a duty 

to avoid self-dealing and to treat their clients’ money as they would 

their own, or with a higher degree of care than their own, even. 

Insurance agents typically aren’t fiduciaries and you have to be 

very careful dealing with them. 

Mr. GARAMENDI. Mr. Chairman, if I might, in California, we do 

have a dual law that allows a person to be both a broker and an 

agent, but there is a very clear distinction. In our proposed regulations, we make it clear what that distinction is. It is not a new distinction. It is based in our law as well as in the various court decisions that have come down over the decades, and that is that a 

broker—a salesperson becomes a broker when they offer their services on behalf of the client. That is, they work for the client, the 

customer, the individual——

Senator FITZGERALD. And you are proposing making them fiduciaries in that instance, is that correct? 

Mr. GARAMENDI. They already are fiduciaries——

Senator FITZGERALD. They already are. 

15

Mr. GARAMENDI [continuing]. In that instance, both under California law and under the various numerous court cases in California. We are not changing it, we are simply clarifying, making it 

clear that that is the situation. So when they offer their services 

to the customer on behalf of the customer, on the other hand, an 

agent is working for the insurance company. There is a clear distinction, at least in the California situation. 

Mr. BLUMENTHAL. You are correct, though, Senator, that in most 

States, including Connecticut, there really is no unequivocal explicit fiduciary duty and that is one of the problems in the State 

laws and the lack of definition as well as the blurring of lines between agents and brokers in many States’ laws. Under the model 

act that the insurance commissioners themselves devised in past 

years, the Model Insurance Act, the Insurance Producers Act, in effect contributed to the blurring of lines between agents and brokers 

and to the evaporation or the lack of——

Senator FITZGERALD. So that model act is a problem because it 

blurs the line. How many States have adopted the model act? 

Mr. BLUMENTHAL. Exactly, and the kinds of reforms that are 

being suggested by Commissioner Garamendi will help, I think, 

lead us out of that morass. 

Senator FITZGERALD. But they need to be adopted not just in 

California and Connecticut. We need to see it changed around the 

country. Mr. Serio, do you care to comment? 

Mr. SERIO. I think that it does need to be changed around the 

country, but I think that defining the fiduciary duty and making 

it binding has to be one central objective. 

Senator FITZGERALD. But making these brokers fiduciaries imposes a lot of new duties and there are a lot of brokers—real estate 

agents, they are probably not fiduciary duties. I would imagine the 

average person out there, if you are going to get a real estate lease 

and say you are a small company and you go to some real estate 

brokerage firm, they could well be steering you to a building where 

the building owner is giving them a kickback for steering you into 

that building. You don’t know who they represent. 

Mr. SERIO. Let us back up a little bit. We don’t want to get 

caught up in the idea of whether the threshold is to be a fiduciary 

duty or not. They are licensed entities, these brokers, and in New 

York, we do have a bifurcation between agents and brokers and 

they do hold separate licenses, so it is a little bit clearer in our jurisdiction as to what banner they are flying under. It doesn’t dissolve the overall question of compensation, but it does at least 

make it a little bit clearer. 

But here is the thing. We take regulatory action against brokers 

every day. We suspend licenses, we revoke licenses, we fine them, 

not because they have violated any fiduciary duty but because they 

have violated the standard of trustworthiness——

Senator FITZGERALD. What is the standard of trustworthiness for 

a broker? 

Mr. SERIO. That they did not act in the best interest of their customer, that they have not operated in the body of law that we have 

and the fact patterns that are presented to us——

16

Senator FITZGERALD. So if they are steering their customers to 

carriers who offer them, the brokers, a bigger commission, they are 

violating their duty to their——

Mr. SERIO. That would be accurate. 

Senator FITZGERALD. In all cases? 

Mr. SERIO. And this is the concern that we have had with this 

entire situation, is that no customer complaints ever came in on 

this issue. The carriers did not come forward to tell us about this. 

And frankly, inside, I am told certain people went to the Attorney 

General’s office. We did not even get an inside view from anybody 

as to how these were operating. But in your normal mom and pop 

operation, when somebody is not happy with the way that their 

broker treated them, they make a complaint to the Insurance Department——

Senator FITZGERALD. Now, you said that on November 5, you 

made a statement that for some reason, the customers of insurance 

brokers were mute on this. Why do you think they are mute? 

Mr. SERIO. Not only have they been mute, but they are still mute 

on this issue. 

Senator FITZGERALD. Are they terrified of Marsh and McLennan 

and AON? 

Mr. SERIO. We have been given some off-the-record conversations 

with individuals who said some of the buyers are embarrassed that 

they didn’t see this happening, that they didn’t say something 

about it when they did see it happening. There are buyers who 

were told about contingency fees or were told they were not going 

to be provided information on contingency fees and they did 

not——

Senator FITZGERALD. So they were embarrassed they were 

snookered. 

Mr. SERIO. And that they didn’t do anything about it. 

Senator FITZGERALD. OK. Mr. Spitzer. 

Mr. SPITZER. Mr. Chairman, you are correct. Additional clarity 

about the precise contours of fiduciary duty and when it is triggered would certainly be helpful. Obviously, as you pointed out, in 

our complaint we allege that a fiduciary duty existed based upon 

representations that were made by Marsh individuals to their clients, and therefore the client could suppose and legitimately rely 

upon the Marsh individuals to act in a fiduciary capacity. 

I would add this other point, however, and I think this is to a 

certain extent what Greg was hinting at. The nature of the violations that we are alleging and that have been plead to and have 

been confessed to by individuals in court do not depend upon there 

being a fiduciary relationship. In other words, this is common law 

fraud. This is a violation of more common law, traditional responsibilities that are incurred even if they do not rise to the level of 

fiduciary. That is why the issue of steering and bid rigging and the 

undisclosed payments are so surprising and appalling to all of us. 

Even in the absence of the fiduciary duty, those would constitute 

violations. 

One last point with respect to the mutinous of those who were 

allegedly the victims. I do think that we are now seeing behavior 

in the marketplace, and this, I think, proves the point that we all 

agree upon. Where this behavior is disclosed, where there is adeVerDate 0ct 09 2002 09:03 Jan 07, 2005 Jkt 097049 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 C:\DOCS\97049.TXT SAFFAIRS PsN: PHOGAN
17

quate opportunity and information flow for the purchasers of insurance to make informed judgments, they will do so. I have heard 

and have reliable information that there is now a very significant 

push back against the brokers by the major purchasers in various 

lines of insurance to ensure that they not only get full information, 

but that they eliminate the type of behavior that is injurious to the 

consumer. 

And so while we may not have seen and did not see—and Greg 

certainly is right about this—consumers running to regulators complaining, we are now seeing them act in their economic self-interest, which is exactly what we want to permit them to do by mandating disclosure and prohibiting certain types of relationships. 

Senator FITZGERALD. Now, following up on the nature of the allegations in your complaint, some commentators have made light of 

your complaint and said, well, the only thing you found that was 

illegal is bid rigging and everybody agrees it is illegal. So what? 

But when I read your complaint, I found that you have six counts, 

I believe, and you found a whole lot more than bid rigging. Maybe 

you would want to elaborate on that. 

Mr. SPITZER. Absolutely. Bid rigging is perhaps the most egregious and the most immediately violative area where we found behavior because it is so clearly corrosive to the marketplace. Steering is in and of itself a violation of law, because when the companies steer, they are making a judgment that is not in the interest 

of their client and they are making it for the improper purpose that 

they are receiving undisclosed additional compensation. 

I have not heard, and maybe you will hear it today from witnesses for the industry, I have not heard a single industry voice 

say steering is OK. Steering is wrong. Steering should not be permitted. We have senior executives under oath. When they see the 

E-mails—E-mails relating only to steering, where they say they are 

appalled, it should not happen, it should not be permitted. Strip 

out the bid rigging component of that. That was really the third 

layer of the onion. Steering is the second layer of the onion, and 

it is sufficient to say these companies have violated their duty. This 

behavior cannot be permitted to continue. 

Senator FITZGERALD. Very analogous to the revenue sharing we 

saw with the mutual fund industry. 

Mr. SPITZER. Absolutely correct. 

Senator FITZGERALD. And you found instances in which Marsh 

and McLennan actually took existing clients who were already 

placed with a given insurer and you had Marsh and McLennan 

pressuring their clients to move their existing policies to some 

other company that was going to pay them a higher contingent 

commission, is that correct? 

Mr. SPITZER. Yes, sir. And, in fact, the most—that is correct. We 

saw oversteering predicated solely upon the overrides that were 

being paid, and we also saw Marsh indicating to certain carriers 

that they should increase their bids so as to eliminate the possibility that the coverage would go to a carrier which was not going 

to pay them as much. I mean, the E-mails where they say, please 

increase your bid because we want the business to stay here or 

move, there is appalling stuff, and yet that is what we were finding. 

18

Senator FITZGERALD. And you also state a count for securities 

law violations. 

Mr. SPITZER. Absolutely. 

Senator FITZGERALD. Do you want to go into that and explain 

how you arrived at that? 

Mr. SPITZER. Sure, because there are disclosure violations. There 

is a duty to disclose to investors what the basis of the revenue 

stream is. Here you had a company that was deriving $854—I 

think that is the right number—$854 million in revenue from contingent fees, the basis of which was not disclosed and the inherent 

illegality which was not disclosed. 

Senator FITZGERALD. And in fact, when they were asked about it 

by analysts on conference calls when explaining their quarterly 

earnings, they refused to go into it, isn’t that correct? 

Mr. SPITZER. They not only refused to break out the revenue that 

they derived, but they claimed that it was too murky and impossible to break out the distinct revenues that flowed from the contingencies when, in fact, internal to the company they had a very 

careful accounting that defined precisely where the contingencies 

came from, how to maximize them, and were acting as one would 

expect, in a way to increase the revenue that was generated. 

Senator FITZGERALD. And this was very relevant information for 

investors and the analyst community because I think just a few 

months before, a J.P. Morgan—I believe it was a J.P. Morgan analyst—had written a whole thing about the dependency of the insurance brokerage market on contingent commissions and this analyst 

questioned whether contingent commissions would still be allowed 

after we were just uncovering similar conflicts in the mutual fund 

industry. And still, Marsh and McLennan was refusing to answer 

questions about——

Mr. SPITZER. That is correct, and just to show that I can say favorable things about that analyst, that indeed was a very prescient 

report where the analyst not only focused on this issue, raised the 

regulatory risk that Marsh was facing, but also quite accurately 

predicted where the stock would move in the event that there was 

any regulatory effort to disallow the revenue streams that he was 

talking about. 

Senator FITZGERALD. Now, do you think that these sorts of 

abuses could have occurred if Marsh and McLennan only had, say, 

8 percent of the market as opposed to 40 percent of the market? 

You have an extremely concentrated insurance brokerage industry 

in America. There were a lot of acquisitions during the 1980’s and 

1990’s whereby the bigger players got bigger and bigger, Marsh 

and McLennan and AON being the two largest. They bought up a 

lot of smaller brokerage firms. Today, those two have about 70 percent, I am told, an estimated 70 percent of the commercial insurance brokerage market for large companies. I guess that would be 

Fortune 1,000 companies they are referring to. 

For some reason, Fortune 1,000 companies, why don’t they go to 

a smaller insurance brokerage agency? Why do they feel compelled 

to use the biggest? 

Mr. SPITZER. Let me make one observation, Mr. Chairman. I 

think you are exactly correct. Certainly, the market power that 

Marsh had in certain cities and in the market writ large contribVerDate 0ct 09 2002 09:03 Jan 07, 2005 Jkt 097049 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 C:\DOCS\97049.TXT SAFFAIRS PsN: PHOGAN
19

uted to its capacity to extract the overrides. Having said that, there 

are much smaller companies that receive a larger percentage of 

their revenue when you look at their total revenue and look at the 

overrides that they receive, a larger percentage of their revenue in 

the overrides. 

I do not agree with you, however, that Marsh would have been 

in a position to structure the illicit relationships that it had absent 

market power. The steering, and then the bid rigging, were dependent upon its capacity to foreclose clients from seeking other 

brokers who might have provided access to the insurance they 

needed. So I believe that it is market strength that was a necessary prerequisite to the structure that we have seen. 

Mr. SERIO. And that market strength came, not just from the 

brokering of insurance business, but from the related services and 

the related organizations that the Marsh entity had acquired over 

the years to make it essentially a one-stop shopping opportunity for 

a lot of large companies. 

Senator FITZGERALD. And those other entities are Putnam mutual funds——

Mr. SERIO. Mercer, risk services, and all these other entities that 

don’t fall underneath any one regulatory umbrella. You were 

speaking a moment ago about the financials of the large brokerage 

and whether this would have been revealed at some point earlier 

if the financials of Marsh or of other large brokerages are actually 

examined on a periodic basis the way company financials are examined on a regular basis. 

Brokers are not inside that regulatory paradigm, however, and 

they largely operate, save for their market conduct activities and 

their relationship to their clients, there really are no other regulatory nexes between the brokers and the insurance regulators 

around the country. Perhaps if they were on a regular schedule of 

financial examinations, those glaring deficiencies in explaining 

where so much of their revenue source was coming from may at 

least have been identified earlier, if not acted upon earlier, if the 

brokers were under the same regulatory regimen that the companies are under. 

Mr. SPITZER. Can I add one last thought——

Senator FITZGERALD. Yes. 

Mr. SPITZER [continuing]. Because I think this interlocking set of 

relationships really is at the essence of it and it is not only across 

a horizontal line to Mercer and to perhaps mutual funds, but really 

even within the insurance sector you have brokerage, you have investments that are made by the companies themselves and underlying carriers. You have investments in reinsurance brokerage and 

you have investments in the reinsurers themselves. 

And so you have these four pieces that all fit together with common ownership that we just don’t understand, and I think it is not 

only market strength in terms of the 40 percent you cited in terms 

of the brokerage business, but also what market strength do they 

garner by virtue of the vertical relationships to insurers, reinsurance brokerage, and then reinsurers themselves. I think that dynamic is one that needs to be——

Senator FITZGERALD. Yes. Does anybody care to comment on the 

reinsurance business? Apparently, both Marsh and McLennan and 

20

AON set up reinsurers, offshore, I believe, in the case of AON, in 

Bermuda, and——

Mr. BLUMENTHAL. I would like to add a thought on this, what is 

fundamentally an antitrust issue, before we move on. I think it ties 

directly to the point you were raising and the reason that we are 

here today. The remedy here has to be stronger antitrust enforcement. If nothing else emerges, and a great deal will besides this 

point, the scrutiny has to be to the size, dominance, market power 

of these companies, and it has to be an ongoing——

Senator FITZGERALD. Of the brokers? Or are you saying of the insurers, as well? 

Mr. BLUMENTHAL. Both. And the interlocking relationships at 

various levels. That is why ongoing scrutiny is so important, and 

that may be where the Federal Government ought to have a role. 

Senator FITZGERALD. Well, let us talk about that for a second. 

The McCarran-Ferguson Act of 1945 exempts the business of insurance from antitrust regulation with a few distinct exceptions, such 

as boycotts and a couple other things. It is not clear to me whether 

the McCarran-Ferguson Act exempts insurance brokers from Federal antitrust regulation. The language is the business of insurance, and clearly it covers carriers. 

Would it make sense to amend the McCarran-Ferguson Act—it 

would be very hard to ever repeal the antitrust exemption with respect to insurance carriers. If you see all the insurance industry 

people in this room, you would understand why, and there are 

other good reasons, actually, to allow companies to share underwriting information with each other, losses, age groups with buying 

cars or driving cars. But let us just focus on insurance brokers. 

Is there a reason to have the insurance brokerage industry exempt from antitrust laws? Shouldn’t McCarran-Ferguson be 

amended to make it clear that exemption from antitrust laws only 

applies to the carriers, not to the brokers? 

Mr. BLUMENTHAL. If it is not clear now, it should be made clear 

so that there can be more robust and effective Federal antitrust enforcement in this area. But the States certainly should pursue 

strong and effective remedies, and perhaps as a result of these 

court actions, there will be. 

Senator FITZGERALD. Now, I want to add that in reading Attorney General Spitzer’s complaint, I got the impression that only a 

company that had a strongly dominant market position could get 

away with the kind of rogue behavior that is outlined in that complaint. I have to believe that Marsh’s humongous market share is 

what enables them, in part, to engage in that kind of rogue behavior. 

Mr. SPITZER. I agree with the following caveat. There is also, to 

use Mr. Grogan’s word, a synergy that benefits both of the carriers 

and the broker when they pay the overrides. One can very well 

view the override payments as an access fee, access to the cartel. 

In other words, if, in fact, Marsh is playing the role of organizing 

a bid rigging scheme that drives premiums up for everybody and 

allocates business among the carriers, the fee that is being paid by 

the carriers to Marsh for entry into that system is the overriding 

set of payments. 

21

Therefore, even without enormous market power, this is really a 

negotiation between the two sides of the transaction, a divvying up 

of the gains that result from the cartel behavior, and I think that 

is a theory that we will be pursuing in terms of damages that arise, 

because obviously the bid rigging drove the entire supply curve to 

a point where premiums were going up and we were all paying 

that in the form of premiums and the division of that gain was reflected by the override payments. So even theoretically, without the 

enormous market power that Marsh had, that relationship could 

have emerged. 

Mr. GARAMENDI. I don’t want to leave the impression that this 

is only a result of market concentration. It may very well be that 

the market concentration created the atmosphere where this kind 

of steering and these kinds of compensations became the norm 

within the industry. But it is clear from our investigations that you 

don’t have to be real large to be engaged in practices that are every 

bit as illegal as what Mr. Spitzer has found with Marsh. We believe 

this goes way down into the smaller reaches of this industry. 

Now, with regard to changing the McCarran law, what we have, 

it seems to me, with Marsh is a synergy in which the company was 

able to use its various pieces, whether it was the reinsurance business or the access to capital and the movement of capital from one 

place to the other or the brokerage, to create opportunities for 

itself, to tie, if you will, one part of its business to another part of 

its business. Tying happens to be illegal in most States, and it may 

very well be as these investigations, as we move to the various 

pages ahead of us in our investigations, that we are going to find 

tying and other State antitrust activities, or State laws, antitrust 

laws, being breached. I would be surprised not to find that. 

Clearly, however, you are onto something very important, and 

that is concentration within the economic systems of this Nation, 

not only with insurance, but in many other economic sectors of the 

Nation. The concentration is an anathema to a competitive market. 

Senator FITZGERALD. Now, what do you all think about, in 1980, 

Congress passed a law that forbade the Federal Trade Commission, 

which enforces our antitrust laws, from even doing studies of the 

insurance industry? Do you care to comment on that? 

Mr. GARAMENDI. Is that the only mistake Congress has made in 

the intervening 24 years? 

Senator FITZGERALD. It looks like it, yes, but what do you think 

of that? 

Mr. SERIO. Whether it is the FTC or it is the GAO or any other 

arm of the Federal Government, the opportunity to study insurance 

and to make recommendations is not a bad thing, and the Congress 

has been doing this more and more. The Congress has become a 

regular partner in insurance, certainly in insurance policy making, 

given the discussions we have been having on SMART, the discussions we had on the Fair Credit Reporting Act, where the NAIC 

and the commissioners endorsed the preemption of the Fair Credit 

Reporting Act and the study of the FTC on the use of Fair Credit 

Reporting standards and creating a uniform standard across the 

spectrum. 

That would not necessarily—I obviously haven’t spoken to my 

colleagues in the commissioner’s rank on this, but I don’t think 

22

that would necessarily be an invasive step into State regulation. In 

fact, if it can help to earmark and identify those areas where either 

stronger regulation is needed or that trade-off between McCarran 

antitrust protection versus greater regulation, because that really 

was the trade-off in McCarran, is that they were given certain antitrust exemptions because there was a body of State regulation, and 

that was, as you said, Mr. Chairman, really focused on the companies, not on the other players in the insurance marketplace. 

And now we need to reevaluate that trade-off and if they are 

subject to McCarran, make it so, or to antitrust rules, make it so. 

Or if you still, and you clarify the rule that they are exempt from 

antitrust through McCarran, then there has to be a coordinated or 

consequent improvement in the State regulatory tools that we have 

at our disposal to better regulate the broker community. 

The size, as Commissioner Garamendi said, is not really the important part of this. In New York, people have gone to prison, State 

and Federal prison, because of the inappropriate use of brokerages 

and the influencing, controlling, tying, whatever you may call it of 

the insurance business between the broker operation and the insurance or the underwriting operation that they controlled jointly. 

Frank B. Hall is a name that we all knew in the 1980’s, where 

you had a broker control problem. The issue was addressed by the 

States in that case. There have been, perhaps, new ways found to 

coordinate, as Attorney General Spitzer said, to interlock the various parts of the insurance process. But the fact of the matter is 

that we really are dealing with a lot of the same issue here, and 

whether the size became a controlling issue or just the ownership 

became a control issue between the broker side and the insurance 

or the reinsurance operations. 

Senator FITZGERALD. In a moment here, I am going to allow Senator Akaka to give his opening statement. I do want to ask Attorney General Spitzer, you have said that you favor a greater Federal 

role here, but are you sure that is the best way when, after all, it 

was you, not the Federal Government, that uncovered the conflicts 

in the securities analyst world? It was you, not the Federal Government, that discovered and put a spotlight on the problems in the 

mutual fund industry. And now it is you, a State Attorney General, 

who has shaken the insurance brokerage world. 

Are you sure—what if the Federal Government came in—this is 

the Federal Government that has tied its hands with respect to 

even studying the insurance industry—what if they pass something 

that preempts people like you from identifying a real problem and 

acting vigorously? 

Mr. SPITZER. First, I would much prefer the Federal Government 

do it. It would make my life much easier. I would have an easier 

time getting out of this room. [Laughter.] 

Obviously, I do not support a preemption amendment that would 

preclude the capacity of State inquiry into these various areas. 

Having said that, I certainly think we need the additional scrutiny 

that can be provided by the FTC, by Congress in the areas that I 

laid out, because your investigative powers are enormous. The 

areas where we have seen interlocking relationships that are injurious to competition, to a certain extent have a nexus offshore precisely because it is very often harder for State entities to inquire 

23

with respect to those jurisdictions. Congress, on the other hand, 

has a greater capacity to do so. The FTC does. 

So we would welcome your joining us in this effort. I certainly 

am not guarding with such loyalty our exclusive jurisdiction. I 

would love to see other entities join this investigation, join in the 

legislative effort, because although the State entities have had 

some success recently, I would hope that dynamic would change 

and that we would see vigorous efforts at the Federal level, as well. 

Mr. BLUMENTHAL. And I would just add, if I may, Senator, because I think that the sentiments that Attorney General Spitzer 

has just articulated are common to most attorneys general, that 

preemption is the anathema here. We have very cooperative relationships, particularly in antitrust enforcement, with the Federal 

Government already and a lot of what we are discussing here really constitutes per se violations of our antitrust laws. Collusion, 

tying, price fixing, bid rigging are simply against the law, end of 

sentence. To ask the questions that you asked really, in many 

ways, is to answer them, that we need a stronger Federal role in 

these areas where in other industries that role would be a given 

and we would be working together. 

All of that said, if there is a Federal role, it ought to be a constructive and helpful one, and in so many other areas, unfortunately, in recent years, we have seen a lack of Federal activism, 

a laxity, and even an attempt to inhibit State action. The environmental area is the best example, but there are others. 

Senator FITZGERALD. I am not sure all of that is going to change 

anytime soon. 

At this point, I will allow Mr. Garamendi, if you have something, 

to join in. 

Mr. GARAMENDI. My good friend, Senator Akaka, please take the 

floor. I will be happy to follow you. 

Senator FITZGERALD. Let me just say I would like to recognize 

the Subcommittee’s Ranking Member, Senator Akaka. We have 

worked closely together the last few years. In fact, I am told that 

we held 13 hearings together in the 108th Congress. We have 

worked together on many financial issues, such as the mutual 

funds, insurance now, and also financial management bills that 

have installed better audits and chief financial officers in some of 

the Federal agencies, such as Homeland Security and the National 

Intelligence Director CFO. 

It may surprise you, but until about 15 years ago, none of the 

Federal agencies were ever audited. Then they started requiring 

audits of the largest departments, and when I came in, the Agriculture Department was missing $5 billion. It was just missing. 

They couldn’t find it—in cash. They later worked that difference 

down to only $200 million, but that is a lot of money. If we complain about Enron having bad accounting, sometimes the Federal 

Government needs to look in the mirror. 

But we have worked very hard to extend audit requirements to 

all Federal agencies. We are now having audited any agency that 

spends more than $25 million a year, and it has been a pleasure 

working with Senator Akaka these years and I want to thank him 

for allowing me to have such a collegial and productive working relationship with him these years. And he kindly every once in a 

24

while sends me some macademia nuts from Hawaii, which are very 

good—— [Laughter.] 

So I want to thank you for that, too. Thank you, Senator Akaka. 

OPENING STATEMENT OF SENATOR AKAKA 

Senator AKAKA. Thank you very much, Mr. Chairman, for calling 

this hearing today. I want to take a moment to pay tribute to our 

Chairman. 

This is the Chairman’s final hearing as Chairman of the Subcommittee on Financial Management, the Budget, and International Security. Mr. Chairman, I want you to know that I really 

appreciated working with you. You have done a great job here. 

Your leadership has been impeccable, and you have been very productive. We have done so many things together and I attribute that 

to your leadership and your focus on the concerns and issues of this 

whole industry. As you mentioned, some of this goes back years. 

With your leadership, we are changing some of that which will 

really help our country in its accountability. 

I want you to know, Mr. Chairman, that I have enjoyed working 

with you on a number of important issues relating to financial 

management and transparency, and I want you to know also that 

I will miss you and you will be missed by the full Committee, as 

well. 

Mr. Chairman, with that, I have a lengthy statement that I ask 

to submit for the record. 

Senator FITZGERALD. Thank you. We will make your statement 

a part of the record. 

[The prepared statement of Senator Akaka follows:]

PREPARED STATEMENT OF SENATOR AKAKA 

Thank you, Mr. Chairman, for calling today’s hearing. This is your final hearing 

as chair of this Subcommittee and I want you to know how much I appreciate the 

work you have done as Chair of this Subcommittee. I have enjoyed working wit you 

on a number of important issues relating to financial management and transparency. You will be missed. 

Mr. Chairman, today, we focus our attention on another scandal—this one involving alleged bid rigging and secret commissions in the insurance industry. This issue 

has been brought to light by the actions of a group of State attorneys general and 

insurance commissioners. 

I realize that investigations are still pending, but I am interested in learning how 

widespread the abuse is in the industry. I am also interested in learning more about 

how the insurance industry operates and, in particular, whether certain types of 

compensation agreements are a potential conflict of interest for brokers because if 

these agreements are a potential conflict of interest, we need to know if enough is 

being done to protect insurance buyers. 

Insurance buyers trust their brokers to search the market for the policy that best 

suits their needs. Brokers should be required to not only disclose the total cost of 

coverage, and also to disclose all compensation received from an insurance company. 

This disclosure must be in plain language so that buyers can make informed decisions. I am troubled that, in the New York lawsuit, it appears that even knowledgeable, corporate, buyers of insurance have been taken advantage of and presented 

with policies that best suited the needs of the broker. Today’s heari8ng will explore 

options to make the process more transparent. 

I also want to know whether the deceptive and questionable practices found in 

commercial property and casualty insurance are also found in other lines of insurance, such as health insurance, where premiums continue to rise. 

Employer-sponsored health insurance premiums increased an average of 11.2 percent in 2004 according to the Kaiser Family Foundation and Health Research and 

Educational Trust. For many working families, these increase have made it more 

difficult for them to make ends meet and to retain their health insurance coverage. 

25

If a portion of the increase in premiums for health insurance may be attributed to 

deceptive and opaque practices among insurance brokers, steps must be taken to 

make sure that families are not overpaying for their current coverage due to the 

questionable activities of some insurance brokers. 

Mr. chairman, another area we will examine is the ability of the states to provide 

defective oversight for the insurance industry. We need to determine whether the 

Federal Government should be more involved in the regulation of insurance activities which are now regulated at the state level. I expect some of our witnesses will 

discuss various legislative proposals including the optional Federal insurance charter and the so-called SMART Act (State Modernization and Regulatory Transparency). There are also suggestions that the Federal Trade Commission be empowered to investigate unfair and deceptive practices within the insurance industry. 

I want to thank all our witnesses for coming today and I look forward to their 

testimony. Mr. Chairman, thank you again for holding this timely hearing. I have 

truly enjoyed working with you during the 108th Congress.

Senator FITZGERALD. We have been joined by Delaware Senator 

Tom Carper, and Senator Carper, we appreciate your being here. 

OPENING STATEMENT OF SENATOR CARPER 

Senator CARPER. Thanks, Mr. Chairman. I apologize for not 

being here earlier. As Senator Akaka may have explained, the 

Democratic Senate Caucus has met this morning to elect our new 

leadership to begin the next Congress and to put the elections of 

2004 behind us. So I apologize. 

Mr. Spitzer, I understand you have testified already, is that correct, and I apologize for having missed your testimony. We are delighted that you are here and we thank you for the input you have 

provided for us here today and, frankly, on a number of other occasions, as well. 

I want to thank our Chairman as he prepares to ride off—sometimes when people leave here, they ride off into the sunset. I think 

when Peter Fitzgerald rides off, he will ride off into the sunrise because he is still among the youngest members of the U.S. Senate. 

It has been a privilege for me to have served with you for these 

last 4 years. As Senator Akaka has said, we wish you only good 

things in the years to follow. We will miss your intellect and we 

will miss your determination just to figure out what is the right 

thing to do and to do it. We will miss your fairness and your evenhandedness in approaching the issues with a real open-mindedness. 

The investigations by, I think, two of the attorneys general that 

are here today have revealed some disturbing information about 

current practices, both legal and illegal practices, that have been 

occurring in the insurance industry. They have caught none less an 

observer than 14-year-old Ben Carper, my son, who is in a stock 

market course at his high school, the Charter High School of Wilmington in Wilmington, Delaware, and every morning, one morning every week, usually Monday mornings, they present from the 

previous week’s news a story that has a real bearing or implication, 

a significance to the stock market. The issue that you have been 

testifying to today, the issue about which this Subcommittee is 

holding this hearing, has not just caught the eye of this Subcommittee and its Chairman and Ranking Member, but also our 

youngest son. We have had some interesting conversations. I don’t 

know what everyone else has been talking about around their dining room table in recent weeks, but we have been talking a bit 

about these matters. 

26

I would just say these revelations raise questions about the roles 

of brokers and agents. They raise questions about the protections 

that exist for consumers, or don’t exist for consumers, and the general regulatory framework for insurance itself. As we delve into 

these issues, they are going to lead to bigger questions and bigger 

issues for us to address in the next Congress. 

So, again, we welcome all of you today. To our Chairman, we 

wish you, as you say in the Navy—I am an old Navy guy—as you 

say in the Navy, fair winds and a following sea. God bless. Thanks. 

Senator FITZGERALD. Thank you very much. 

I have two final questions before we allow you to have a break 

and invite the second panel up here. I want to know whether there 

is any information that consumers of residential insurance policies 

or automobile policies, if they need to be concerned here. Have either of the attorneys general or the insurance commissioner from 

California found any problems with agents or brokers or personal 

lines of insurance, steering their clients to carriers who give them, 

I don’t know, free trips to Hawaii? 

My own insurance agent came out here with his daughter from 

Elk Grove, Illinois, and he has assured me that he has never accepted those forms of compensation that are sometimes offered by 

the carriers, maybe free trips to Hawaii, for example, if you place 

a number of your policies with a specific carrier. Have any of you 

done any work in this regard? 

Mr. GARAMENDI. Mr. Chairman, indeed, it is probable that there 

will be and do exist problems in the personal line insurance sector. 

We see this in—the potential to be there. These additional compensations, whether they are called contingency commissions or the 

like, in all probability exist in the personal lines area. We are looking into this in California. We have concerns about it. 

The way we are going about it is two-fold. First, with the regulations that we want to put in place to provide clarity that all fees, 

whenever an individual is acting in a broker’s capacity, as distinct 

from an agent capacity, but in a broker’s capacity, that all fees be 

fully disclosed and then to draw a bright line about what the proper activity of a person acting as a broker could engage in. 

Senator FITZGERALD. Are there greater disclosure requirements 

for the individual lines of insurance, typically? 

Mr. GARAMENDI. When a producer, a licensed person, whether 

that person is an agent or a broker—as I said, in California, it is 

a dual license. You can be either, and you may be one in one circumstance, as an agent, and in a different circumstance, acting as 

a broker. But there is clarity in at least California when a person 

begins to act as a broker. That is, they offer themselves as representing the interest of the consumer as opposed to an agent who 

is offering themselves to represent the interest of an insurance 

company. So there is a very clear distinction. 

We want to further clarify that with the language of the regulations and also to make it clear what activities would fall within or 

without the appropriate fiduciary responsibilities of a person acting 

as a broker. So we want to do that. That is the reason for the regulations. 

As I said, we are now engaged with other insurance commissioners around the Nation through the National Association of InVerDate 0ct 09 2002 09:03 Jan 07, 2005 Jkt 097049 PO 00000 Frm 00030 Fmt 6633 Sfmt 6601 C:\DOCS\97049.TXT SAFFAIRS PsN: PHOGAN
27

surance Commissioners to propose a model, which could be a law 

in certain States that don’t have that clarity in their law, or a regulation for those that have a legal foundation to write a regulation. 

So that is underway. Investigations are also underway and will undoubtedly play themselves out. 

Now, we are being assisted by private attorneys who are bringing 

suits on behalf of individuals, companies, corporations who have 

been wronged by this entire practice which is being discussed here. 

We will, in California, undoubtedly join with some of those private 

attorneys. We will also join with our Attorney General in looking 

into all of these matters and probably bringing suit in various 

areas. We consider it to be a very serious problem. 

I know you are on this question, but before I leave this panel, 

I would like to comment on the proposed SMART legislation if you 

intend to come to that. 

Senator FITZGERALD. Well, we will be interested—Senator Akaka 

has some questions and I would like to allow him and Senator Carper, if he has questions, too. 

Senator AKAKA. Thank you very much, Mr. Chairman. I would 

like to ask two questions. 

One is to Attorney General Spitzer. My constituents are increasingly concerned about the rising costs of their health insurance, 

and it is not only Hawaii but across the country. My question is, 

are the deceptive and questionable practices found in property casualty insurance also found in other lines of insurance, such as 

health, and what impact have these practices had on the rising 

costs of health insurance? 

Mr. SPITZER. Senator, it is a little question. I would be a little 

cryptic, only because I don’t like to state conclusions until we have 

completed an investigation and filed a litigation, but suffice it to 

say we are finding the types of practices that are laid out in both 

the Marsh and the ULR complaints and the various civil and criminal complaints, as well, in other lines of business, as well. The various form of the overrides, the forms of the incentives may differ, 

but the underlying economic impact is ordinarily the same. It is 

both to create misincentive, distortive incentive, and then to drive 

the cost of premiums up. 

I would just say in response to the Chairman’s question about 

how does this manifest itself in other lines of the insurance sales 

marketplace, we have found not only trips as an incentive, but also 

loans and offers of stock that are made to individual brokers or 

agents and repayment for either the loan or the stock is contingent 

upon the magnitude of commissions that are generated for the company or sales or the volume——

Senator FITZGERALD. Stock in the insurance company being offered back to the agency? 

Mr. SPITZER. That is correct, and often, whether or not there is 

required repayment——

Senator FITZGERALD. Stock or stock options? 

Mr. SPITZER. It can be both. But as I say, we are just beginning 

to delve into some of these areas, and sometimes it is loans outright, loans of cash, capital, and again, repayment schedules and 

obligations are contingent upon how much business is generated in 

terms of the volume of product of the underlying carrier that is 

28

sold. So this manifests itself in many different ways. But as I said, 

we have only begun and we have limited personnel, so we are delving into this now and we will get into it in due course. 

Mr. GARAMENDI. Just very briefly, we have reason to believe that 

this issue spills over into employee benefits, and that would be 

health care plus other kinds of employee benefits, disability and 

the like. 

Mr. BLUMENTHAL. And in answer to your question, Senator, 

these kinds of arrangements directly raise the cost of insurance to 

your constituents because they add a level of private gain that goes 

into somebody else’s pockets. The corrosive, corrupting effect on the 

entire health care system cannot be underestimated. I would agree 

with both of my colleagues here that we will see evidence of the 

same kinds of practices in other lines, not just employee benefits, 

but health care and automobile insurance, as well. 

Mr. SERIO. If I may, Mr. Chairman and Senator Akaka, one of 

the distinctions, though, for some States on health insurance as 

compared to property casualty, or even other forms of employee 

benefits, such as in New York, we have specific statutes with respect to how much commission can be paid on certain health insurance products. There are caps. It is generally about 4 percent. 

So that gives us at least a bright line standard that you don’t 

have that has complicated some of these other issues about what 

is an appropriate compensation level, and that has created a statutory model. We put that model into place, first, because of the concern over the high price of health insurance, and second, because 

of the large number of not-for-profit health insurers in the marketplace. And so we have actually been regulating commission structures in the health insurance field for a very long time that we do 

not do in other areas. 

Senator AKAKA. Thank you for those comments. 

Mr. Serio, I understand that NAIC is doing much to modernize 

State insurance regulations through efforts such as an Interstate 

Insurance Product Regulation Compact. I am pleased that Hawaii 

is one of nine States, I understand, that have enacted this compact 

legislation. What are the biggest challenges to reaching the goal of 

regulatory uniformity? 

Mr. SERIO. I think one of the biggest challenges to achieving regulatory uniformity has been the push-back by a number of interests 

in the industry who have been looking for regulatory uniformity as 

a way to get to less regulation. 

We have had an interest. In fact, we have had good conversations, both here in the Senate and over in the House, on what the 

commissioners need in terms of creating a better and a more modern regulatory structure. In fact, we were very pleased that Chairman Oxley over in the House put many of the things that appeared 

in what we called the NAIC road map into the first SMART bill 

draft, including greater financial surveillance, including greater 

oversight in receiverships and things of that nature, because those 

are things that we have identified to the Congress, shortcomings in 

the current State legislative structure for powers to the regulators. 

This is actually very relevant to the conversation we are having 

here today because a lot of these problems that have come up in 

the past have usually found themselves in the forms of insolvenVerDate 0ct 09 2002 09:03 Jan 07, 2005 Jkt 097049 PO 00000 Frm 00032 Fmt 6633 Sfmt 6601 C:\DOCS\97049.TXT SAFFAIRS PsN: PHOGAN
29

cies, that people had been untowardly using the insurance process 

to drive a company into insolvency. In the 1980’s, it was broker 

control that led to insolvencies of insurance companies. In the early 

1990’s, we had the same problem. 

This situation is a little different, but as I said earlier, I think 

broadening out the financial surveillance powers of the insurance 

departments as is being proposed in the SMART bill will give us 

a great leg up from where we currently stand with respect to being 

able to modernize State regulation. 

Senator AKAKA. Thank you very much, Mr. Chairman. 

Senator FITZGERALD. Thank you very much, and I want to thank 

this panel. I think you have been terrific. It strikes me as I listen 

to the testimony that there could possibly be no end to the amounts 

of conflicts that you might find, especially the attorneys general, in 

other industries, as well. I was thinking about the real estate brokerage area, areas where people aren’t necessarily fiduciaries. 

I even thought of another one that you may not think of very 

often, but in the media. Last week, I was at the St. Louis Post Dispatch at an editorial board interview and they reminded me that 

in 1949, the St. Louis Post Dispatch, together with a now-defunct 

paper, the Chicago Daily News, won a Pulitzer prize for uncovering 

that 32 newspaper editors and publishers in Illinois were on the 

then-Governor Dwight Green’s State payroll, typically for $10,000 

a year, which in 1949, that is like $100,000 today, and they won 

a Pulitzer prize for that. 

So the possibilities of conflicts are almost endless here and you 

give us a lot of food for thought and I think that it has been very 

helpful hearing the testimony from you both for Congress and for 

consumers nationwide. So thank you all very much for being here. 

At this point, I would like to take about a 2-minute break and 

then we will reconvene with the second panel. 

[Recess.] 

Senator FITZGERALD. I would like to reconvene this hearing, if we 

could have order in the hearing room. 

I now call on our witnesses for panel two. Our first witness is 

Albert Counselman, President and CEO of Riggs, Counselman, Michaels and Downes in Baltimore, and I guess you go by Skip, is 

that right? 

Mr. COUNSELMAN. That is right, Mr. Chairman. 

Senator FITZGERALD. Mr. Counselman is appearing today on behalf of the Council of Insurance Agents and Brokers, which represents the largest of all commercial insurance agencies and brokerage firms. Mr. Counselman is a former Chairman of the Council. His other insurance industry affiliations include Vice President 

and Director of Professional Agencies Reinsurance, Limited, former 

Chairman and Director of Assurance Global, and Director of the 

American Institute for Chartered Property Casualty Underwriters. 

Our second witness is Alex Soto, President of InSource, Inc., of 

Miami, Florida. Mr. Soto is representing the Independent Insurance Agents and Brokers of America, known as the ‘‘Big I,’’ for 

which he currently serves as Vice President. Mr. Soto was elected 

to the organization’s Executive Committee in 2001 and has served 

as Chairman of its Communications Committee and the Branding 

Task Force and Natural Disaster Committee. He also served as 

30

1The prepared statement of Mr. Counselman appears in the Appendix on page 96. 

Chairman and State National Director of the Florida Association of 

Insurance Agents. 

Our third witness is Ernie Csiszar, the President and CEO of 

Property Casualty Insurers Association of America, which is 

headquartered in my home State, in Des Plaines, Illinois, not too 

far from my home. Mr. Csiszar previously served as President of 

the National Association of Insurance Commissioners and as South 

Carolina’s Director of Insurance. Originally from Romania, Mr. 

Csiszar has an extensive background in business and investment 

banking. 

Our fourth witness is Janice Ochenkowski—I hope I pronounced 

that right? 

Ms. OCHENKOWSKI. You did. 

Senator FITZGERALD [continuing]. Who serves as Vice President 

for External Affairs for the Risk and Insurance Management Society, known as RIMS. She currently is Senior Vice President and 

National Director of Risk Management at Jones Lang LaSalle, Incorporated, a global real estate services company that is headquartered in Chicago. Ms. Ochenkowski has been responsible for 

risk management at Jones Lang LaSalle and its predecessor companies since 1980. 

Our fifth and final witness on this panel is J. Robert Hunter, Director of Insurance at the Consumer Federation of America. Mr. 

Hunter has served as Texas Insurance Commissioner and as the 

Federal Insurance Administrator, which handles the flood insurance program, I believe? 

Mr. HUNTER. It was then, but yes, it does now. It was at HUD 

when I was——

Senator FITZGERALD. Oh, OK. You were in that position as Federal Insurance Administrator under Presidents Ford and Carter. 

Mr. Hunter is an actuary and he is well known as a long-time consumer advocate. They could use you to solve our pension problems, 

too. We need some actuarial help on Capitol Hill. 

Again, I would like to thank our distinguished witnesses for 

being here today to testify. In the interest of time, your full statements will be included in the record and we ask that you limit your 

opening remarks to 5 minutes. Please watch the light. Since we 

have such a large panel, we will adhere to the 5-minute rule to ensure that there is sufficient time for questions. 

Mr. Counselman, you may begin. 

TESTIMONY OF ALBERT R. COUNSELMAN,1 PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, RIGGS, COUNSELMAN, MICHAELS AND DOWNES, INC., ON BEHALF OF THE COUNCIL 

OF INSURANCE AGENTS AND BROKERS 

Mr. COUNSELMAN. Thank you, Mr. Chairman. As you stated, I 

am representing the Council of Insurance Agents and Brokers 

today. The CIAB member firms employ more than 120,000 people 

and annually place more than 80 percent of all of the U.S. commercial property casualty insurance products. 

Insurance brokerage is highly competitive and it is built and relies on trust, trust between the broker and the client, trust between 

31

the broker and the carrier, and ultimately through those two relationships, trust between the carrier and the client. The ultimate 

trust between carrier and the client is essential because the insurance business is one of promises, including the promise of the clients to detail the nature and the extent of its risk exposures and 

the promise of the carrier to cover those exposures in case of trouble, accident, or tragedy. 

At the outset, we are deeply troubled by the charges of bid rigging and fraud brought by Attorney General Spitzer. Such activity 

is not only outrageous, but it is illegal and it has no place in an 

industry that is based on trust. These individuals have not only severely damaged their own brokerage firm, but they also have cast 

an undeserved pall on an entire industry. They besmirch the reputations of honest brokers throughout the country and they have 

undermined the trust on which our industry was built. 

While bad actors created a corrupt scheme to limit real choices 

for some customers, the role of contingent commissions in this evil 

equation has been irresponsibly represented. Contingent commission payments were not central to the alleged fraud despite the 

connections that some have claimed. Contingent commissions are 

legal and proper methods of compensation that have been used 

throughout the industry for decades. Although they are not a significant source of income in most firms, they are nonetheless well 

understood and accepted by the commercial marketplace. 

It is lack of effective disclosure, in some cases combined with the 

intent to defraud, that is at issue, not a systematic industry-wide 

failure to disclose fees or a failure of the entire business model, as 

has been suggested. 

Even so, we realize that there is increased concern and confusion 

in the marketplace and we support clear disclosure of this income. 

The Council had such a policy in place since October 1998, recommending precisely such disclosure. 

It is most important that the solution to these examples of fraud 

and this chance to improve disclosure be developed in the legislative and in the regulatory cycle and not in the news cycle. Contrary 

to recent news stories, isolated examples of abuse should not be 

equated with an industry-wide system of ‘‘secret payoffs and conflicts of interest.’’ While such overheated charges create good headlines and produce new class actions for lawyers, they do not represent grounds for a stampede to judgment on a wrong-headed solution. Solutions should be based on facts and on deliberation, not 

headlines. 

We don’t believe that the fraud Attorney General Spitzer uncovered resulted from a failure of the State-based insurance regulatory 

system. The toughest of regulations or laws will not stop an individual intent on malfeasance. That said, we also believe that regulatory reform is essential for the industry’s long-term viability because of the inherent inefficiency and the confusion stemming from 

a vast array of overlapping and sometimes conflicting regulatory 

requirements imposed from State to State. 

As public policy objectives are pursued, we believe lawmakers 

and regulators must be mindful that the development of a relationship between broker and carrier is essential to enable brokers to 

provide the best possible products and services to their clients. A 

32

1The prepared statement of Mr. Soto appears in the Appendix on page 107. 

strong relationship with the carrier gives the broker clout that benefits the customers for lower premiums, better coverages, specialized coverages, and quicker service and claims payment. 

This is why the characterization of the client-carrier relationship 

as adversarial is misguided. At the end of the day, the carrier partners with the client through the broker intermediary, not as opponents but in a cooperative way to ensure that the risks that a client presents are properly covered. 

All the compensation paid to a broker is funded by a client, either through direct payments or through the client’s premium payments. Contingency arrangements established by insurers have 

been a feature of the compensation landscape for decades and generally have been well understood and accepted by the commercial 

client base. They replace a portion of the up-front commissions previously paid to producers and on average contribute approximately 

4 to 5 percent of a brokerage firm’s income. On average, for most 

firms, this represents 1 percent of premium volume. Again, we support and encourage client disclosure of such commissions. 

To conclude, let me say I am deeply troubled by the evidence of 

egregious conduct uncovered by Attorney General Spitzer. Bad actors should be prosecuted to the fullest extent of the law and this 

pattern of behavior must never be repeated. But contingent commission arrangements, when properly constructed, disclosed, and 

utilized, fulfill a need in the industry to help foster a cooperative 

insurance environment that works to benefit all participants, the 

commercial client, the carriers, and the producers. We strongly 

support improved disclosure and heightened transparency in these 

arrangements in order to remove any potential specter of conflict. 

As I said at the outset, this industry is based on and committed 

to trust, trust between broker and client, broker and carrier, and 

ultimately carrier and client. We stand ready to work with the appropriate committee of jurisdiction in the Congress and the States 

to find solutions to the issues raised at this hearing to ensure that 

this trust is maintained and the important work of the insurance 

industry, which is protecting people and the economy, continues. 

Thank you, Mr. Chairman. 

Senator FITZGERALD. Thank you, Mr. Counselman. Mr. Soto. 

TESTIMONY OF ALEX SOTO,1 PRESIDENT, INSOURCE, INC., ON 

BEHALF OF THE INDEPENDENT INSURANCE AGENTS AND 

BROKERS OF AMERICA 

Mr. SOTO. Chairman Fitzgerald, I am delighted to be here. As 

you already stated, I am Alex Soto. I represent the Independent Insurance Agents and Brokers of America. I am a volunteer leader 

within that organization. We have more than 300,000 independent 

agents and employees that work and are located in practically 

every town throughout America. 

The way I make my living is as an independent agent in Miami, 

Florida. As you stated earlier, I am president of an agency called 

InSource, Inc. We are primarily a property casualty agency, where 

we sell commercial insurance products as well as personal insurance products to customers in our general area. 

33

I echo the comments made by Mr. Counselman in that our organization obviously deplores the activities that you have uncovered 

and that Mr. Spitzer has uncovered, issues such as bid rigging and 

market manipulation. Unfortunately, not only are they illegal, but 

they have given all of us, brokers and agents and everyone in the 

industry, a black eye. 

I also concur with the fact that those who are proven guilty 

should be punished swiftly, and again to the full extent of the law. 

And quite frankly, we applaud the efforts of the regulators and the 

attorneys general. 

Senator my world is completely different from that which you 

were describing earlier today of the mega-brokers that have the 

ability and the power to influence and manipulate the marketplace. 

My world, and I want to take a moment to share it with you, is 

one of extreme and high competition. 

You know, in the State of Florida, there are more than 50,000 

licensed agents and solicitors. In my county, Miami-Dade, we have 

5,000 licensed agents and solicitors who I compete with every day. 

On top of that, I am in competition with the direct sellers of insurance, those mechanisms that do not use an agent. I am in competition with the Internet, everyone that is putting wares on the Internet. I am in competition with affinity groups, such as the AARP. 

I am even in competition with credit unions that have tie-ins with 

insurance companies. 

And on top of that, one of my major insurance companies informs 

me that more than half of all the business that they write in my 

State, in the State of Florida, is written by brokers and agents outside of the State of Florida. So I am not only competing with the 

people in my State, but elsewhere. 

Every day, I must prove myself and the people in my office, not 

only with our prospects, but we must prove ourselves with our current customers. When a client invites us to bid on their insurance, 

that is precisely what we are doing. We get no up-front fee. We get 

no payment from that client. We simply are given an opportunity 

to do a great deal of work to prove ourselves, that there is more 

value in doing business with me and with InSource than their current relationship. 

They define value in being the best price, the coverage that they 

are looking for, the best coverage, the quality of the insurance company that is being offered, and the services that I provide, my 

agency will provide to them. If I do not prove myself to be a better 

value in those terms to that prospect, I will not be selected. If I 

am not selected, I do not get paid by the client or anyone else and 

my expense is one that I have to eat. 

If I do get paid, obviously, I get paid a commission by the insurance company that we place the business with. The competitive 

marketplace keeps agencies responsive and accountable, and I 

think you hit it on the head. More competition is better for the consumer. It is the best. What I have found over my years in the business are the checks and balances. 

We do support, where the brokers are concerned, we do support 

transparency. It goes without saying that those people that are 

paid by the clients and also paid by the insurance companies need 

to make sure that all parties clearly understand where the money 

34

1The prepared statement of Mr. Csiszar appears in the Appendix on page 115. 

is, what the money is, and where it is coming from, and clearly, 

those must be agreements that must be reduced to writing and approved by both the client and the broker. The client obviously can 

dispute them and simply decide to do business with somebody else. 

We do support and we use them, independent agents throughout 

America, contingencies. Contingency is agreement. I cannot comment on PSAs or MSAs because I do not receive those, and candidly, I am almost embarrassed to admit to you that until this all 

emerged, I really had practically no familiarity with even those 

terms. 

But contingency agreements are legal. They reward excellence, 

as they do in every other transaction, promotional transaction in 

the United States. They are good business practices and they do 

serve a legitimate purpose. It creates an incentive for the agent to 

be a good front-line underwriter in the selections of risk and it also 

incents the agent to be a good risk manager in helping the client 

to put in place measures that will help them reduce their losses. 

When that occurs, everybody wins. The client wins, because on an 

ongoing basis, fewer losses will translate into less expensive premiums in the future. The insurance company pays less claims and 

they share a little bit of that profit if, indeed, the lower losses are 

there. 

Finally, we believe in State regulation. It has been my experience 

that regulation closer to home is the best regulation. Insurance 

commissioners in my State have taken numerous steps to protect 

the citizens of the State of Florida after the four hurricanes that 

we had, and I saw it firsthand after Hurricane Andrew. However, 

the system needs modernization and uniformity, and thus we support the SMART Act. In concept, it is a good venue because it will 

leave regulation at the State level, but there will be a certain 

amount of uniformity and modernization. Now, I underscore that 

this is a draft proposal so it needs to be worked on. This will provide targeted Federal tools with uniform standards to keep State 

regulations. Thank you, Mr. Chairman. 

Senator FITZGERALD. Thank you very much, Mr. Soto. Mr. 

Csiszar. 

TESTIMONY OF ERNST N. CSISZAR,1 PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA 

Mr. CSISZAR. Mr. Chairman, thank you for the invitation to appear today. I am so sorry that this is your last session. I would 

have been delighted to serve as one of your constituents. I am a 

new resident of Chicago, the proud owner of a new mortgage in 

Chicago, so——

Senator FITZGERALD. Are you registered to vote? 

Mr. CSISZAR. Yes, absolutely. [Laughter.] 

Absolutely, so I am so very sorry to see you go because I think 

your leadership role on this Subcommittee in terms of the investigation that you have carried on, whether it be with respect to 

Enron, whether it be with respect to the bond market, with respect 

to the investment banking industry in which I had a few years’ exVerDate 0ct 09 2002 09:03 Jan 07, 2005 Jkt 097049 PO 00000 Frm 00038 Fmt 6633 Sfmt 6601 C:\DOCS\97049.TXT SAFFAIRS PsN: PHOGAN
35

perience a few years ago, I think they have been very valuable and 

have been of extreme usefulness, I believe, in bringing abuses to 

light that otherwise might not have been done so. 

I will tell you that, speaking on behalf of over 1,100 members of 

the PCI, we welcome your oversight. In fact, we encourage your 

oversight because I, like all the panelists that I have heard this 

morning, I, too, am here to condemn in the strongest of terms any 

criminal—and I will go beyond criminal—any criminal, any deceptive, any anti-competitive conduct on the part of any member of a 

market. 

We truly have a large market in the insurance industry and it 

is a market that is based on trust, public trust in particular. Any 

activity that impedes on that public trust is activity that must be 

condemned and it must be stopped. 

In addition to that, any activity such as criminal, deceptive, anticompetitive activity also impedes on that free flow of information, 

that free flow of accurate information that is the very foundation 

of an efficient market, if you will. 

So we really think that these allegations, and I think they certainly look like they are going to be proven, are allegations that 

point to conduct that is absolutely deplorable. As I said, my 1,100 

members welcome this. 

Having said that, I also want to make a few comments about the 

industry itself, because I have heard you and others this morning 

speak about this cartel arrangement and so on. To some extent, I 

think there is a good deal of truth in that. But what I would like 

to draw the Subcommittee’s attention, and Mr. Chairman, you in 

particular, your attention to is the fact that there are over 2,700 

companies that compete in this business. There are over 1.9 million 

people who are involved directly in the distribution of insurance 

products. It is a highly fragmented industry when you look at it 

overall. 

Now, in this particular segment of the market, of course, the brokerage market, it is very true that three players, from what I understand, controlled 80 percent-plus of the market. So it is very 

highly concentrated. But overall, the market is very fragmented 

and the returns in that market prove it. If you look at insurance 

returns over the long term, they tend to be in single digits. In fact, 

some would argue that there is an inverse risk relationship at work 

when it comes to the insurance market, too much risk for too little 

return, if you will. 

So it is a market that is very competitive, not just from a distribution standpoint but from a carrier standpoint as well as a reinsurer carrier. There are any number of reinsurers in the United 

States. There are a number of reinsurers in Bermuda. The Lloyd’s 

market is also very active in this. The London market, in general, 

is active. So overall, it is a very broad industry. It tends to be a 

highly competitive industry and our point very simply is that what 

we are seeing here emanates in a very specific and a very narrow 

segment, albeit a very profitable segment of the insurance industry. 

As regards contingency fees, our view is, first of all, one of the 

problems with these agreements is I swear they shouldn’t even be 

called contingency fees because they are taking the contingency out 

36

1The prepared statement of Ms. Ochenkowski with an attachment appears in the Appendix 

on page 123. 

of it. In fact, if anything, there was a good deal of certainty attached to some of these agreements that the commissions would be 

payable. There was very little about them to be contingent. 

A true contingency agreement, however, such as the one described by Mr. Soto here, truly addresses a maybe, a perhaps. It 

is not tied to a specific policy. It is not tied to the placement of a 

specific policy. It is tied to overall volume, and quite often it is also 

tied to overall profitability, and oftentimes that profitability doesn’t 

emerge until years later. Workers’ compensation, for instance, it is 

a long tail line. So whether it is profitable or not sometimes takes 

years to determine. 

So it is not as simple as Mr. Spitzer would like it to be, perhaps, 

and quite frankly, we see contingent commissions as nothing more 

than mutual instruments. They can be used and they can be 

abused, as they were in this case, I believe. There is no reason to 

ban contingent commissions. What we suggest, of course, is that we 

take a true transparency, a true disclosure route to this, and that, 

in fact, we take one that is relatively uniform. 

One of the problems with State regulation, and I believe, having 

been a regulator, I wholeheartedly agree with the need to modernize State regulation. The fact of the matter is, a uniform approach in terms of good, solid transparency and disclosure, we believe would solve the problem. 

My time has run out and I will leave it at that. Thank you. 

Senator FITZGERALD. Thank you very much. Ms. Ochenkowski, 

thank you for being here. 

TESTIMONY OF JANICE OCHENKOWSKI,1 SENIOR VICE PRESIDENT, RISK MANAGEMENT, JONES LANG LASALLE, AND 

VICE PRESIDENT FOR EXTERNAL AFFAIRS, RISK AND INSURANCE MANAGEMENT SOCIETY 

Ms. OCHENKOWSKI. Good afternoon, Mr. Chairman. As a lifelong 

Illinoisan, I, too, would like to thank you for your efforts on this 

Subcommittee and the work that you have done to restore integrity 

into the governmental process. We all appreciate it. 

I am here representing the Risk and Insurance Management Society, which is the largest professional organization for the risk 

management community. We appreciate the opportunity to be 

heard on this issue. 

Our member companies, which number over 4,000, are commercial insurance consumers and we are directly affected by the issue 

of broker compensation and placement practices. Our membership 

spans the country and consists of entities in all different industries 

and sizes, including 84 percent of the Fortune 500 companies as 

well as approximately 950 small businesses, which we define as 

those with fewer than 500 employees. Many of our member companies have full-time risk management departments, while some rely 

solely on brokers for services. 

RIMS has always believed that the relationship between brokers 

and insurance consumers should be governed by the principle of 

complete transparency. We emphasized this position initially in 

37

1 Exhibit A and B appears in the Appendix on page 128. 

1999 and again in a statement issued in August of this year that 

provides that broker compensation and placement agreements 

should be transparent, with all sources of compensation, direct and 

indirect, disclosed without client request prior to the placement of 

business and annually by line of coverage. A complete copy of that 

statement is attached to my testimony. 

RIMS is shocked by the recent allegations of illegal activities by 

certain brokers and insurance companies in the placement of insurance contracts. We have been particularly distressed by the findings and allegations of New York Attorney General Spitzer that insurance brokers have violated their position as trusted advisor to 

their clients by steering clients to favor the insurance company and 

engaging in bid rigging schemes. Such activities undermine the 

trust and confidence that are at the heart of the customer-broker 

relationship. Our President, Nancy Chambers, issued a statement 

addressing this issue on October 22, a copy of which is attached to 

my testimony.1

Insurance brokers are an integral part of the insurance placement system. Brokers serve as intermediaries between commercial 

customers and insurers. Traditionally, brokers represent their customers while insurance agents represent insurance companies. 

Commercial insurance transactions are often very complex and brokers are essential to finding available insurance coverage to meet 

their customers’ needs. 

RIMS, itself, is not a standard setting body for the insurance industry. RIMS does, however, place great emphasis on educating 

and advising its members about current issues and providing them 

with useful tools to deal with these issues, and this is the approach 

taken by RIMS with respect to contingent fees. 

As the use of placement service agreements and contingency arrangements became popular with some insurance brokers and insurance companies in the 1990’s, RIMS advised its members of 

these practices. In 1999, RIMS issued a disclosure statement 

whereby brokers would disclose insurers with which they had contingency fee agreements upon the clients’ request. Brokers and insurance companies declared at that time that contingent fees represented only a small part of total fees, and as such, our approach 

seemed appropriate. 

RIMS followed up on that 1999 statement through institution of 

a quality improvement process in 2000, which is a comprehensive 

program designed to guide and facilitate quality improvement for 

risk managers. We use these guidelines to improve communication, 

develop performance expectation agreements, and to evaluate 

broker performance under these agreements. This agreement states 

that all remuneration for services should be disclosed to the client 

while complying with local insurance laws. 

Further, in representing the interest of risk managers, RIMS 

provides workshops, discussion groups, and other educational programs that address the most pressing issues of the day. In fact, for 

the past 3 years, at its annual conference, RIMS has explored the 

many facets of the client-broker relationship through a series of 

sessions. We believe that by educating our members, they will be 

38

1The prepared statement of Mr. Hunter appears in the Appendix on page 130. 

fully equipped to evaluate potential conflicts of interest in the 

placement of insurance policies. 

As the facts are becoming known and the investigation into 

placement service agreements continues, in an effort to address the 

potential conflict of interest issue, RIMS would support a prohibition on the use of placement service agreements by insurers and 

brokers. Three of the largest brokers have publicly stated they will 

no longer enter into placement service agreement or accept contingent fees. Such actions, coupled with compensation disclosure, 

should bring greater transparency to the broker-client relationship 

and help to restore trust and confidence. 

Whatever actions legislators and regulators decide are appropriate to address the issues of placement service agreements and 

contingency compensation, the interests of insurance consumers 

must be considered. Consumers should not have to pay higher costs 

for insurance because of abusive actions that may have been taken 

by some brokers and some insurers. And hopefully, any remedial 

action will result in lower costs for insurance for consumers by 

eliminating improper actions that might have increased these 

costs. The recent allegations against several insurance brokers in 

New York have been very troubling. These allegations have not 

only undermined the broker-client relationship, but they have 

wider implications for the industry as a whole. And any penalties 

that may ultimately be levied against these companies involved 

should be used to offset consumer losses that have resulted from 

these deceptive practices. 

We understand that the NAIC is preparing to address the broker 

compensation issue and that one approach in their agenda is the 

adoption of a model law on disclosure of broker compensation arrangements. RIMS believes that a national uniform approach 

should be taken to address this issue. Regulatory clarity and uniformity are needed, not 51 different approaches. 

Thank you for this opportunity to testify on this important issue. 

RIMS looks forward to working with you and your Subcommittee 

and with Congress to address this issue and we appreciate your 

time and interest and leadership. Thank you. 

Senator FITZGERALD. Thank you very much. Mr. Hunter. 

TESTIMONY OF J. ROBERT HUNTER,1 DIRECTOR OF 

INSURANCE, CONSUMER FEDERATION OF AMERICA 

Mr. HUNTER. Mr. Chairman, on behalf of CFA’s 50,000 Americans, we would like to thank you for what you have done in your 

tenure. It has been terrific. You are one of our heroes and we would 

like to publicly say that. 

Senator FITZGERALD. Thank you. 

Mr. HUNTER. There are four major issues that we see from the 

Spitzer investigations. 

First, and of greatest importance, the investigation reveals how 

easily sophisticated buyers of insurance can be duped by brokers, 

agents, and insurers. Imagine the potential for abuse with small 

businesses and individuals as they try to manipulate the insurance 

marketplace. It is a highly complex marketplace. They are buying 

39

legal documents they don’t understand. They need help, so they go 

to people and say, take me. Help me. They are vulnerable. 

They have to not only find out whether they are comparing like 

policies, they have to look at the solidity of the insurer, they have 

to look at the service record because they can’t kick the tires. They 

may not have a claim for years. They have to go through the underwriting process. And then they have the complex pricing systems, credit scoring, where you live, all these things, many determining price. 

This complexity causes weak competition at all levels of this 

business, not just for large businesses. CFA review of rates 

charged, for example, show that it is easy for the exact same insured to pay two to three times within the market. A competitive 

market should have a narrow range, not a range like that. In Hawaii, for example—I wanted to use Illinois, but they don’t produce 

this information—in Hawaii, a clean auto risk, buying liability coverage, can pay $397 from USAA or $993 from Geico Casualty—

same exact risk. Figure that out. 

In 2003, the property casualty insurance industry paid contin- gency commission kickbacks of $4.2 billion. 

Second, the findings of bid rigging are a reflection of the deeply 

rooted anti-competitive culture that exists in the insurance industry. The culture derives from what you pointed out, the antitrust 

exemption in McCarran. We still see cartel rating organizations 

setting large parts of insurance rates for many companies, determining what future costs will be, and the FTC is handcuffed. 

Thus, in November 2003, industry executives could freely meet 

to discuss pricing. ‘‘Let us not get pulled into a soft market. We are 

not ready for a soft market. We can’t afford one. We need several 

more years of profitability,’’ said James Schiro, CEO of Zurich Financial. Responding, Maurice Greenberg, Chairman and CEO of 

AIG, said, ‘‘As an industry, we saw much further to go to even get 

to a marginally acceptable return. We absolutely need to hold the 

line on pricing and not give in to competition.’’ That is the industry. 

Third, the Spitzer complaint shows that insurance regulators 

have utterly failed to protect consumers and to properly regulate 

insurers and brokers in a number of key aspects. To make matters 

worse, many of these regulators recently collaborated with insurance interests to deregulate particularly commercial insurance and 

especially the so-called sophisticated lines that we are now seeing 

were abused. 

Finally, the Spitzer investigation makes clear that consumer protection standards must be raised, not lowered as the industry is 

pushing for. 

There are five steps we would ask you to consider, three of which 

you mentioned, so I am going to go short on those. 

One, you should do no harm. Congress should do no harm. You 

should stop consideration of bills that would weaken consumer protections. We urge Congress not to enact optional Federal charters 

that would result in concentration, as it did in banking, or create 

a rush to the bottom as regulators compete to get share. 

We also urge that Congress stop consideration of the so-called 

SMART Act. The SMART Act actually goes so far as to completely 

40

deregulate the cartel rating organizations but leave the Federal 

antitrust exemption intact. That is crazy, but that is what is in it. 

Senator FITZGERALD. If I can interject, what are the rating organizations——

Mr. HUNTER. The rating organizations are like the Insurance 

Services Office and the National Council on Compensation Insurance. They establish loss costs, the major part of the rate. They do 

it jointly. They project the future for what are the costs going to 

be next year. They get together and do this. It would be like building contractors getting together and agreeing on the price of bricks 

for next year and labor. It is clearly, if you look at the House Judiciary Committee hearings, it clearly would violate antitrust law if 

the antitrust law were applied, but it is not. 

The insurers do need to have some joint historic data, but all the 

testimony was that you don’t need the antitrust exemption for that. 

As long as you truly use historic data and don’t manipulate it, you 

can have that. But the manipulation of data is where the problem 

lies. 

Second, we suggest considering a Federal minimum standards 

bill for States to enforce. States have been gutting consumer protections in recent years in an attempt to hold off the Federal interest. They have been trying to keep the insurers on their side by 

saying, look, we can go even lower than those guys are willing to 

go, and they have been gutting regulations. It has been interesting 

since Spitzer’s investigation to see them sort of get almost a stiff 

neck as they try to turn around to go back and say, we are trying 

to regulate. 

They have market conduct studies. They should have caught 

this. They go in with these market conduct and financial investigation studies and they catch nothing. The same thing happened with 

life insurance abuses a few years ago, when Prudential and all 

ended up having to pay billions because of lawsuits. They don’t 

catch anything. 

If there is to be a Federal standards approach, the standards 

need to be high. I list some in my testimony. I hasten to say, even 

with high standards, a Federal approach is fraught with risk since 

the Federal regulatory expertise and—there is a strong possibility 

that any Federal regulator would be subject to regulatory capture 

just as the States have been. Therefore, there needs to be wellfunded approaches so that there can be a consumer advocate representing consumer interests. 

Third, unleash the FTC. I am not going to say any more about 

that. You have already talked about that. 

Fourth, repeal the antitrust exemption. I am not going to talk 

any more about that. I just think it is obvious that this industry 

has an anti-competitive history and it still functions that way. 

Fifth, require transparency. For over 20 years, consumer advocates have called for disclosure similar to an energy efficiency 

ranking you see when you shop for a refrigerator. We suggest that 

Congress would require a point-of-sale disclosure of the insurance 

policy value. The disclosure would show the expected payout per 

dollar of premium—how much you are going to pay out in claims, 

commissions, contingency commissions, overhead, profit, etc., and 

41

the actuaries know the figures because that is the way they set the 

rates. 

Right next to it, you would display the same information for this 

product for the overall industry. Consumers could focus on, for example, the part of the premium expected to be paid out in losses. 

If the consumer was considering a policy that would pay out 50 

cents per dollar but the industry average was 70 cents, the consumer would know this is a bad deal and ought to drop it. 

I am way over my time. Sorry. 

Senator FITZGERALD. Thank you very much. 

All of you have had great testimony, all a little bit different angles, and all of you represent different constituencies. Just for the 

sake of our audience and people who may be watching this on C–

SPAN at home, Mr. Counselman, you represent the Council of Insurance Agents and Brokers. Essentially, you represent the larger 

brokers——

Mr. COUNSELMAN. We include in our membership the larger brokers, but our members include small brokers, as well. But our distinctive character is commercial insurance. 

Senator FITZGERALD. But Marsh and McLennan and AON——

Mr. COUNSELMAN. They are also members. 

Senator FITZGERALD. Mr. Soto, you represent the Independent 

Insurance Agents and Brokers of America, the smaller agents, is 

that correct? 

Mr. SOTO. That is correct. The average size of our membership 

is probably 10 to 12 employees. 

Senator FITZGERALD. Are Marsh and McLennan and AON, are 

they also members of your association? 

Mr. SOTO. Some of their branch offices have joined our State organizations. On a national basis, they are not a member, the parent companies. Neither are those large brokers. 

Senator FITZGERALD. OK. Mr. Csiszar, you represent the Property Casualty Insurers Association of America. You represent the 

carriers as distinct from the brokers, correct? 

Mr. CSISZAR. Yes. 

Senator FITZGERALD. Now, Ms. Ochenkowski, you represent the 

Risk and Insurance Management Society, which is, you said, 80 

percent of Fortune 500 companies. These are the purchasers of 

large corporate insurance policies, and so you are representing clients of insurance brokerage firms and underlying carriers. 

Mr. Hunter, you represent the Consumer Federation of America, 

which represents the little guy, the ordinary consumer. So I just 

wanted to have that straight for all our audience members. 

Mr. Counselman, you defended the contingent commissions. 

Ms. Ochenkowski, you said you would be happy to see the elimination of the placement service agreement, which is the form of 

contingent commission agreement or arrangement that Marsh and 

McLennan specifically had. You weren’t as clear about whether you 

support—you didn’t say, if I listened carefully, that you support 

prohibiting contingent commissions. You said you support prohibiting placement services agreements. Do you still think contingent 

commissions should be allowed? 

Ms. OCHENKOWSKI. To be clear, we would support the prohibition 

of all of those forms of the contingent commission as well as the 

42

placement agreements. We have found through the information 

that has been provided in recent weeks that all forms of this compensation seem to put people in the position of behaving differently 

than they would if these agreements didn’t exist. And as has been 

pointed out, the existence of contingent agreements in theory has 

not been illegal and we have not supported their abolition. But 

when we look at this entire issue, we think that—our position has 

evolved over time and we are in support of abolishing all of——

Senator FITZGERALD. And you would like your members, these 

big companies that are trying to get insurance now, you think you 

want the brokers to clearly be working on their behalf, not be also 

accepting compensation from the insurers, is that accurate? 

Ms. OCHENKOWSKI. Yes. 

Senator FITZGERALD. Now, Mr. Counselman, what do you say to 

your customers? They don’t want you getting payments from the 

insurance carriers as well as from the buyers of the policies. 

Mr. COUNSELMAN. Mr. Chairman, you raise a good point. My concern is that there is an understanding of what a contingent commission is versus a placement service agreement which could be 

called a form of contingent compensation. But the contingent compensation that I am focusing on in particular in my testimony is 

loss ratio driven. It is provided by the insurer as part of the commission compensation package. 

Senator FITZGERALD. OK. Let me stop you right there. There are 

different types of contingencies. Typically, you can get paid for 

bringing in business to the insurance carrier that has a low loss 

ratio. In other words, the carrier is trying to incentivize you to go 

out and bring them good customers who aren’t going to run up the 

losses. 

Mr. COUNSELMAN. Correct. 

Senator FITZGERALD. There are other types of contingent agreements that just pay you for bringing more policies from wherever 

it comes, revenue. 

Mr. COUNSELMAN. Correct. 

Senator FITZGERALD. Now, you run an insurance brokerage, correct? What is the name of it? 

Mr. COUNSELMAN. Riggs, Counselman, Michaels, and Downes in 

Baltimore. 

Senator FITZGERALD. OK. Do you accept contingent commissions? 

Mr. COUNSELMAN. Yes, we do. 

Senator FITZGERALD. And how are they based? 

Mr. COUNSELMAN. They are based—there are many, because the 

companies present them to us, so we have many from many different companies. The majority, more than 50 percent, are loss 

ratio based. They are not all loss ratio based——

Senator FITZGERALD. Do you deal with any carriers who don’t 

pay you a contingent commission? 

Mr. COUNSELMAN. Some carriers do not. The majority of the 

major carriers do——

Senator FITZGERALD. And do you steer many of your clients to 

those? Do you put many of your clients into the carriers who don’t 

pay you a contingent commission? 

Mr. COUNSELMAN. Absolutely, because the primary concern, and 

this would be true for all agents and brokers, the primary concern 

43

is to place the proper client in the proper insurer for their situation. The secondary concern for all agents and brokers is what is 

the compensation. But as has been pointed out, disclosure and 

transparency are what allow that to happen. 

Senator FITZGERALD. Do you disclose your arrangements to your 

customers? 

Mr. COUNSELMAN. Yes, Mr. Chairman, we do, and we——

Senator FITZGERALD. You are not required to, though, unless 

they ask, is that correct? 

Mr. COUNSELMAN. That is correct, but we think it is a good practice to do so. 

Senator FITZGERALD. Do you even if they don’t ask? 

Mr. COUNSELMAN. If they don’t ask, we still think it is a good 

practice to do so. 

Senator FITZGERALD. But do you? 

Mr. COUNSELMAN. We do on the majority—many of our commercial presentations. We do not typically on small commercial, meaning very small clients who don’t seem to have interest in that. But 

if they did, we would be pleased to provide that information, and 

we don’t on personal lines. 

Senator FITZGERALD. But you always put your clients in the policies with the carriers that are best for them. You don’t let the extra 

payments from the carriers influence or cloud your judgment? 

Mr. COUNSELMAN. If we didn’t do the latter, if we didn’t always 

put clients in the best insurer for their circumstance, we would not 

be in business for very long because our environment is—it is a 

competitive environment and it is the right thing to do. I mean, if 

I were a client, I want to be treated that way. 

Senator FITZGERALD. I tend to agree with it with respect to the 

smaller commercial clients. Now, do you have any Fortune 500 clients? 

Mr. COUNSELMAN. We do have a handful, but not very many. 

Senator FITZGERALD. OK. 

Mr. COUNSELMAN. We do have some, however. 

Senator FITZGERALD. OK. But below the Fortune 500 or the Fortune 1,000 companies, there is a lot of competition amongst insurance brokers and I would have to say that my conclusion would 

probably be that contingent commissions, if there is a firm consistently steering their clients to poor policies in consideration of the 

contingent fees that they are receiving, they are not going to do 

very well for very long as an insurance brokerage, and——

Mr. COUNSELMAN. There is also the distinction of contingents are 

different in different lines of business. In some lines of business, 

they are paid. In other lines of business, they are not paid. 

Senator FITZGERALD. Where are they paid and where are they 

not paid? 

Mr. COUNSELMAN. They are, for example, typically paid for property insurance, automobile, general liability. They are typically not 

paid for what are considered the higher risk, less predictable lines 

of coverage, like umbrella excess liability, the high limits of excess 

exposure or umbrella liability exposure. They are not paid typically 

in professional liability lines of business, directors and officers——

Senator FITZGERALD. How about health insurance? 

44

Mr. COUNSELMAN. Health insurance, they are quite often paid 

and they are quite often—they are more often in health insurance 

related to premium volume and not to loss ratio. 

Senator FITZGERALD. OK. 

Mr. COUNSELMAN. So that is why I say that more than 50 percent in the business are loss rated, but there are many that are 

not. 

Senator FITZGERALD. OK. Continuing my thought, I think there 

is, for the smaller companies and for individuals, there is plenty of 

competition, but with respect to the largest companies, the Fortune 

500 companies, it appears two insurance brokerage firms, Marsh 

and McLennan and AON, have 70 percent of the business. So companies in RIMS, Ms. Ochenkowski’s association, you are typically 

going to have a choice of just a handful of insurance brokers and 

they have an awful lot of leverage with you. Why is it that your 

members don’t go to other smaller firms? Or why is it that they 

stick with Marsh and McLennan or AON? 

Ms. OCHENKOWSKI. Well, Mr. Chairman, we have not done a 

study of this, but my own observations would be that most of the 

larger companies have much more complex insurance placements 

and so they have more sophisticated advisory needs. It has been 

perceived, rightly or wrongly, that the larger insurance brokers are 

capable of delivering that more sophisticated analysis. They have 

additional ancillary services such as loss control services, actuarial 

services, etc., that are available to commercial insurance buyers 

and those have been helpful in assessing the underlying risks. 

Senator FITZGERALD. So your biggest members of your association feel they have to go to one of these really big, behemoth insurance brokerage firms like Marsh, AON, or Willis in order to get the 

services they need? That doesn’t give you many options, does it? 

Ms. OCHENKOWSKI. It does not. 

Senator FITZGERALD. Are you worried about the concentration 

amongst the large insurance brokers? 

Ms. OCHENKOWSKI. We certainly are becoming more concerned 

about it. However, as we have seen competition and we have felt 

that in terms of risk management and the quality process that we 

have, in terms of the way in which risk managers have evaluated 

the bids that have been placed with them, the procedures that we 

have used internally, until the recent Spitzer allegations, we felt 

that those practices were sufficient to steer us in the proper direction. 

Quite frankly, I think that is still truly the case except for those 

extraordinary incidences of fraud, where there is price steering and 

bid rigging. We are very closely watching the investigations that 

are going on so that we can better understand what the implications are for us as a whole. 

Senator FITZGERALD. Now, Mr. Csiszar, you represent the insurance carriers themselves. Aren’t you worried about the concentration at the insurance brokerage level for large-dollar corporate policies? Isn’t there a danger for some of your association members 

who refuse to play ball with a Marsh and McLennan or an AON, 

that they could simply move the whole swath of customers away 

from you and put them with another insurer who pays them a 

higher commission? 

45

Mr. CSISZAR. Let me make it clear, Mr. Chairman, that in the 

case of our members, and I think this applies to the industry in 

general, we deal with agents as well as brokers and the brokers are 

but one small part of that business. I don’t have the numbers, but 

my estimate would be that, by far, the largest amount of business 

comes in either through your employees as agents or captive 

agents. By far, the largest volume of business would come from either a Geico-style operation, where your own employees are agents, 

or you have captive agents, or you have independent agents. The 

brokerage business is but one part, a separate part, of what the 

carriers do. 

To the extent that you would have anti-competitive behavior of 

whatever kind going on in that segment of the market, yes, indeed, 

we would be very concerned about that. 

Senator FITZGERALD. How many of you have read the Spitzer 

complaint against Marsh and McLennan? Have you all read it? 

Mr. SOTO. Parts of it. 

Senator FITZGERALD. Parts of it. There is a section in there in 

which the New York Attorney General’s Office describes how 

Marsh and McLennan ordered their people to yank policies from 

carriers who weren’t giving them much in the way of contingent 

commissions and move it over to carriers who were paying them 

more of a commission. That is pretty incredible, isn’t it? 

Mr. CSISZAR. Very much so. Very arrogant behavior, I would 

say—beyond arrogance. 

Senator FITZGERALD. Now, it seems to me that this kind of rogue 

behavior would not succeed for very long in a very competitive market, but where you have two big brokerage firms with 70 percent 

of the market and the top three maybe 80 percent of the market, 

they can behave in this kind of abusive way. Do you agree with——

Mr. COUNSELMAN. Mr. Chairman, I don’t agree that is a prevalent practice, what has been described. I don’t disagree that it occurred and I don’t disagree that it is a problem. But Marsh and 

AON have a large percentage of the market—I have heard 80 percent said several times today—of a certain segment of the business. 

That may be 80 percent of the Fortune 1,000 business. It may be 

80 percent of the Fortune 500 business. I don’t know which it is. 

But in many markets, our members, the Council of Insurance 

Agents and Brokers members, are the dominant or the largest in 

their market. There are some cities where Marsh or AON are the 

largest. There are many cities where they are the largest. But 

there are many other cities where they are not dominant. That 

may mean there is different behavior that we observe in different 

cities. 

Senator FITZGERALD. How about where you are in Baltimore? 

Mr. COUNSELMAN. They are not the dominant——

Senator FITZGERALD. Are you dominant? 

Mr. COUNSELMAN. We are dominant in our market. 

Senator FITZGERALD. What market share do you have in Baltimore? 

Mr. COUNSELMAN. I don’t even know, but it would be probably 

well less than 10 percent. It is probably less than 5 percent, if 

even—it is probably less than 1 percent. I don’t know the numbers, 

46

because it is the kind of market that Mr. Soto described, where 

there are thousands of agents who are competing every day. 

The Washington, DC market, which is not very far from where 

I live, is a different market and that market tends to be more 

dominated by a few small brokers. So the market is different. 

My point is that in the whole commercial marketplace, Marsh 

and AON are significant because they are so large, but so are all 

of the others collectively. And so whatever rules or laws may need 

to be amended, we also need to understand what is the impact on 

the rest of that market, which may be as large as 50 percent. It 

is not that Marsh and AON have 80 percent of the total market. 

They may have 80 percent of their target market. 

Senator FITZGERALD. Now, you defend the contingent commissions and you don’t believe that it led to the bid rigging, but in the 

Spitzer complaint, he talks about the added fees as being a big incentive, and it is clear if you read the complaint that the added 

fees they could get from contingent commissions were one of the 

reasons they tried to rig bids in certain circumstances so that they 

could place the insurance with a carrier who would give them more 

of a kickback. 

Let me just read one paragraph from the Spitzer complaint. This 

is paragraph 35 on page 12. ‘‘Marsh executives have issued directions about specific companies, as well. For example, in April 2001, 

a global brokering managing director in the excess casualty group 

in New York wrote to the heads of regional offices. She asked for, 

1,920 accounts that you can move from an incumbent insurance 

company to a company that had just extended its contingent commission agreement.’ She warned, however, ‘You must make sure 

that you are not moving business from key contingent commission 

companies.’’ So she is saying, just move it from the companies that 

aren’t paying us big contingent commissions. Highlighting the incentive represented by her directive, she concluded, ‘‘This could 

mean a fantastic increase in our revenue.’’

Mr. Counselman, you don’t believe this is a conflict of interest 

when the broker is accepting payments from the carriers to steer 

business to them? 

Mr. COUNSELMAN. What you just described to me is a conflict of 

interest. But Marsh and AON—I presume AON. I don’t know if 

AON has global brokering like Marsh did as described in Attorney 

General Spitzer’s suit. But what is described in Attorney General 

Spitzer’s suit is the centralization of the marketing or placement 

of the business in conjunction with these placement service agreements. What goes on in the majority of our members’ offices is 

placements in different companies, insurance companies, are done 

in those individual offices throughout the country where the client 

is located. 

Senator FITZGERALD. Each office may have their own contingent 

commission agreement. And Marsh used to be that way and then 

they centralized it in New York and then they sent out directives 

from New York to all the branch offices that are here, are the ones 

who are paying us the most nationwide and you need to steer your 

customers to buy their insurance from these carriers. 

Mr. COUNSELMAN. That is what I have read and that is what is 

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place, which is why I am urging caution, because we are in numbers more firms and more individuals and a very significant part 

of the insurance marketplace and how insurance is placed in individual offices close to the client with individual agreements. 

Senator FITZGERALD. Mr. Soto, in the small insurance market—

you represent the smaller agents—does your office in Miami, do 

you accept contingent payments from insurers? 

Mr. SOTO. Yes, we do, Senator. 

Senator FITZGERALD. Would you accept them on, say, an individual coming in to place automobile insurance with you? 

Mr. SOTO. We have insurance companies that pay us contingency 

commissions in commercial lines as well as in personal lines. 

Senator FITZGERALD. So should consumers of personal insurance 

around the country be worried that their small broker is getting a 

contingent fee from the insurance carrier? 

Mr. SOTO. Excellent question. In theory, yes. In actual practice, 

that marketplace dictates that I have got to come up with the very 

best or I will lose it. If you look at the history——

Senator FITZGERALD. Because you have lots of competition. 

Mr. SOTO. Yes, and if you look at the history of what has happened in personal lines in the United States, about 30 years ago, 

the independent agency system actually dominated personal lines, 

and then a number of direct writers and captive agents created a 

model which was very competitive. They drove down the cost not 

only in terms of the overhead, but loss control, and over time, because of competition, because insureds over the years found that 

that model was very attractive, books of business shifted over to 

the point that we now control about 30 percent of the marketplace. 

The companies that we do business with have reacted to that and 

become more competitive, more aggressive, and I can give you a 

couple of examples. 

For example, there is one company that sells directly to the clients and pays no commission and has no contingency arrangement, 

but we can beat and love to compete against that particular company because those expenses have not disappeared. They have internalized them and they spend a substantial amount of the premium dollar in advertising, which is not an arena that we are talking about here. 

The companies that I do business with, the model that they have 

created is one where I go out and get the client. I do some individual advertising in my community, in the churches, in the 

Kiwanis and all of that and I attract business and I can compete 

very well with those individuals. But at the end of the day, if I 

don’t bring more value, they will not change their insurance to me 

so it is hari kari, economic hari kari for my office to not look at 

the bottom value. 

Senator FITZGERALD. Mr. Hunter, what about that? If we eliminated or prohibited contingent commissions, do you think consumers would really wind up saving money, and are you sure they 

wouldn’t suffer by not having as good of services on the part of 

their agent or on the part of their broker? 

Mr. HUNTER. There is no doubt they save money because, first 

of all, the individual and small business market is not a sophisticated market and it frequently doesn’t do much shopping. It goes 

48

to an agent and the agent says, I represent ten companies. They 

think the agent will shop. There are no suitability requirements. If 

they have a captive person, they can put them in the higher-price 

company. That is why you have rates so incredibly wide apart. 

I had a dean of a law school call me. He was furious because he 

was in AllState and he thought he had a good rate but he was in 

the AllState. He was not in insurance, he was in indemnity and he 

had been in there for 10 years, but he always qualified for the low 

rate. He was paying twice as much. He only found out by chance. 

He brought a lawsuit and he got his money back. But that is a sophisticated consumer who thinks they are doing well. This is a 

complex thing, a lot of same-name companies and all that. 

But even more concerning than the sales incentives are the profitability contingent commissions, and I think we are going to see 

something about that. Lots of people have been told not to file 

small claims lately by insurance agents and brokers, particularly 

in the last few years. So you can easily devise a hypothetical where 

someone coming in late in the year might be the—that $1,000 fender bender might lose the contingency for that loss ratio profitability. It is a danger. It is a temptation. I don’t know of anybody 

doing it, but I didn’t know what was going on with Marsh and 

McLennan, either. 

Senator FITZGERALD. Perhaps we should be more concerned 

about the contingent fees being charged of ordinary consumers 

than we are concerned about contingent fees being charged of the 

large Fortune 500 or 1,000 companies. Should Congress really care 

if Marsh and McLennan or AON skin IBM or Caterpillar? Should 

we care about that? 

Mr. HUNTER. Absolutely, from a consumer point of view, because 

they are going to pass through the cost to us. 

Senator FITZGERALD. They are going to pass it on to us, OK. But 

certainly we should be concerned about it in the case of ordinary 

consumers getting their homeowners’ or automobile policies. Mr. 

Csiszar. 

Mr. CSISZAR. Mr. Chairman, I think—I keep coming back to the 

fact that let us not mix apples and oranges here. Mr. Hunter talks 

very broadly about contingent commissions. I think it is important 

to distinguish between agents and brokers and make it very clear 

that the agent represents a company and there is a contract between the company and the agent and the best cure for the consumer—do you know when I was a regulator what I would tell my 

consumer? When I had 225 companies writing automobile insurance in little old South Carolina? I told them to go shopping around 

because by shopping around, they got the best rate, and there were 

plenty of places to go for shopping. So if the law dean has a problem, the answer is go shop around and you will find out that you 

will have more than one choice. 

Senator FITZGERALD. Isn’t that right, Mr. Hunter? If you are 

going to a State Farm agent, you know they are selling State Farm 

policies and probably everybody recognizes that is the only thing 

you can get there and they are trying to get more business for 

State Farm. They work for State Farm. 

Mr. HUNTER. There is no State that doesn’t have an Unfair 

Claims Practices Act. If an agent or a broker—it doesn’t matter in 

49

this example—if an agent or broker delays my claim to get it past 

the reporting period so that they can keep their override contingent 

commission on profitability, or tells me not to submit it because it 

is not covered when it is, or tells me not to submit it because my 

rate will go up when you shouldn’t tell me that, that is illegal in 

every State for agents as well as brokers. 

Senator FITZGERALD. Mr. Soto. 

Mr. SOTO. May I comment on the issue of the claims reporting? 

First of all, it is, and I almost hate to use the term, ludicrous, and 

if you notice, Mr. Hunter indicated that he has not heard of any 

single incidence, but in theory, something could happen at the very 

end of a year. Somebody might not report a claim if you are on December 31. And yes, in theory, that can happen. 

In actual practice, the reality is that part of my process of proving myself every day is one where the moment that a claim occurs, 

that client is looking to me to be prompt about reporting, to explain 

the process, to be an ombudsman if the claims adjustor is not calling them, and it is difficult to envision that if you have a kitchen 

fire, I am going to delay 2 weeks in reporting it and either win 

brownie points with you or get away with it. It is almost impossible 

to imagine on a Workers’ Compensation claim that every State has 

a responsibility and a law under penalty that it must be reported 

within 24 hours. And you can go on and on with every line of insurance. It just really in actual practice doesn’t happen. 

Could you find one or two examples of somebody who may have 

done that? I suppose you could, but I think that you set the standard early on when you said, are some of these problems individualized or are they systemic and do we need to make radical changes 

in the system because we have uncovered a few malfeasances? I 

think that is an excellent standard to look at this. Could that happen? Yes, it could happen. Does it happen in real life? I would suggest to you that practically never happens. 

Mr. HUNTER. I would suggest to you I would expect that practically it was impossible for Marsh to bid rig, but there was an incentive and they did. If the agent or a broker has an incentive not 

to file a claim, they might do it. 

Senator FITZGERALD. Now, on the bid rigging—I have found in 

these Senate hearings that for every villain, there tends to be a 

hero. There were some insurance carriers that refused to go along 

and I believe one of them was CNA, is that correct? 

Mr. CSISZAR. Yes. 

Senator FITZGERALD. CNA wouldn’t touch that. Were there others, Mr. Csiszar? Who were they? 

Mr. CSISZAR. There were others who are members of our association. 

Senator FITZGERALD. Would you like to name them, because it is 

in a positive light. 

Mr. CSISZAR. I would rather not because there have been subpoenas issued——

Senator FITZGERALD. OK, but CNA Insurance, I recall, was one 

that refused to go along with the charade. 

Now, wouldn’t the insurance carriers like to get rid of the whole 

contingent commission arrangement? Isn’t it kind of a shakedown 

of the insurance carriers when Marsh and McLennan comes to you 

50

and says, hey, if you don’t play ball with us and give me part of 

your revenue, kick it back to us, we are going to move insurance 

business? 

Mr. CSISZAR. Again, I would like to distinguish between agents 

and brokers. For a company to pay contingency fees to an agent is 

a way to incentivize the agent. That is something—that is what 

you see with the car salesmen. That is what you see with a food 

broker, for instance. That is what you see in other industries, 

where you are incentivizing your own agent, independent or otherwise. 

On the brokerage side, I will give you an example. I just bought 

that famous house in Chicago and it so turns out that after looking 

at 50 homes, I kept coming back to the same house and it had only 

been listed the day before or 2 days before. Well, as we are looking 

at that house, my agent informs me that she is also the listing 

agent on that house. Did I object to that? No. She had done a tremendous job taking us through 50 or 100 different homes. She was 

very clear in disclosing it to me. And, in fact, I appreciated the fact 

that she disclosed it and I don’t mind her double-dipping on the 

commission because she has actually done a good job. 

I keep coming back to that on the brokerage side, it is the disclosure issue that is the real problem, true enforced disclosure. And, 

in fact, we have enough laws on the books to force that disclosure 

now. If the SMART Act were to pass, for instance, we would have 

even more tools in our hands. We would homogenize and make it 

uniform, make it the same disclosure everywhere. 

So I think we have got the tools to do this work and what happened is the enforcement process fell apart and you had a few arrogant players in the market who took advantage of it and had the 

market power to do it. 

Senator FITZGERALD. OK. So we have greater disclosure, but you 

still have two large brokerage firms with 70 percent of the large 

corporate market. That is enough leverage to exact other types of 

payment probably out of the insurance carriers. Are you worried 

about the concentration in the insurance brokerage industry? 

Mr. CSISZAR. I think that even the large clients will discover that 

there are other brokers out there who could do as good a job as the 

large brokers. Do I know the tie-ins? Oftentimes, they stem from 

the fact that an AON or a Marsh can do catastrophe modeling for 

you. They can do financial modeling for you. They have other 

value-added services. 

I think that if General Motors wants to shop around, they can 

actually shop around and find another broker to deal with, because 

while there is concentration, I think that competition will break 

that concentration. 

Senator FITZGERALD. What do you think about that, Ms. 

Ochenkowski? He is saying that General Motors, IBM, or Microsoft, 

they can probably go ahead and use a smaller insurance broker 

who can provide the same services. Is there maybe an attitude in 

the largest corporations in America, the Fortune 500 companies, for 

example, whoever is the risk manager, just in order to cover himself or herself, feels safer going to a larger insurance brokerage 

firm? I had better use Marsh and McLennan so nobody else quesVerDate 0ct 09 2002 09:03 Jan 07, 2005 Jkt 097049 PO 00000 Frm 00054 Fmt 6633 Sfmt 6601 C:\DOCS\97049.TXT SAFFAIRS PsN: PHOGAN
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tions me when I am in the—is there that kind of mentality, do you 

think, going on? 

Ms. OCHENKOWSKI. There may be some of that, and I think there 

are also true services. If you are global or multinational or even a 

national company, it is helpful to deal with a national or multinational broker so that there are service offices in the various cities 

in which a client also has operations. And that is one area in 

which——

Senator FITZGERALD. Does anybody besides Marsh and 

McLennan and Willis have international reach, or global——

Mr. COUNSELMAN. Mr. Chairman, yes——

Ms. OCHENKOWSKI. Some do, yes. 

Senator FITZGERALD. You do? 

Mr. COUNSELMAN. Yes, many of our members do go through 

other members who are members of networks that operate in other 

countries. 

Senator FITZGERALD. So you could help somebody in London? 

Mr. COUNSELMAN. Absolutely. 

Mr. SOTO. And you can contract for the service. You know, I am 

dying to slide one of my business cards to her—— [Laughter.] 

Senator FITZGERALD. There you go. 

Mr. SOTO. The reality is that as I have read this material, I have 

been flabbergasted by the fact that you have that kind of power to 

control large segments of business, and I am trying to raise my 

hand—I am talking about the mega-brokers—and I am trying to 

raise my hand and say, the reality is that we can either directly 

through alliance or through contracting, you can contract services 

such as loss control analysis and all of that. It doesn’t really have 

to all be housed in-house. 

Senator FITZGERALD. Well, it is——

Ms. OCHENKOWSKI. Perhaps there ought to be better marketing, 

too, from the smaller regional agencies to larger insurance consumers. They don’t think that sophisticated insurance buyers 

would choose to close the door on any viable options, although part 

of what you suggested in your question may be true, and that is 

that the senior management of our firms as well as shareholders 

sometimes respect the placement of coverage with other wellknown names because there is a feeling of competence that comes 

from a household name. 

Senator FITZGERALD. Ms. Ochenkowski, your members are not 

exempt from Federal antitrust laws. 

Ms. OCHENKOWSKI. That is correct. 

Senator FITZGERALD. Do you think insurance brokerage firms 

should be exempt from Federal antitrust laws? 

Ms. OCHENKOWSKI. Well, that is something you raised earlier 

and it is not something that RIMS as an organization has considered. It is a very interesting question and I think we would like 

to think about it a little bit and come back to you with our response. 

Senator FITZGERALD. I am not suggesting the repeal of 

McCarran-Ferguson with respect to insurance carriers. That is a 

totally different thing, but specifically with respect to brokers. It is 

not clear to me whether the McCarran-Ferguson Act, which proVerDate 0ct 09 2002 09:03 Jan 07, 2005 Jkt 097049 PO 00000 Frm 00055 Fmt 6633 Sfmt 6601 C:\DOCS\97049.TXT SAFFAIRS PsN: PHOGAN
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vides an immunity from antitrust for the business of insurance, 

meant to apply to insurance brokerage services. 

Mr. COUNSELMAN. We believe that brokers are subject to antitrust laws——

Senator FITZGERALD. You do? 

Mr. COUNSELMAN. Yes, and that the insurance—the McCarranFerguson Act protects or provides, has provisions for certain activities of insurance which allows rate making, for example, collecting 

data. 

Senator FITZGERALD. So you think the Justice Department could 

bring an antitrust lawsuit against Marsh and McLennan or AON 

just as the State of New York has brought an antitrust lawsuit 

against Marsh and McLennan? 

Mr. COUNSELMAN. I think that is conceivable. 

Senator FITZGERALD. You do? Mr. Csiszar, would you care to 

comment on that? It wasn’t clear to me by reading the McCarranFerguson Act. 

Mr. CSISZAR. It is not clear, though certainly—and there has 

been no court case that I know decides it, either. But I think the 

thrust of McCarran-Ferguson had to do with the risk taking side 

of the business, not the insurance side. 

Senator FITZGERALD. By the carriers, not the brokers, correct? 

Mr. CSISZAR. Right. 

Senator FITZGERALD. And so we are sitting here where there are 

two companies with 70 percent of the large corporate market and 

some of the panelists are suggesting that the McCarran-Ferguson 

Act was not meant to provide immunity from antitrust to insurance 

brokers. Maybe this is something the Justice Department should 

take a look at, because I don’t believe these kind of abuses could 

have gone on successfully or had much of an effect in driving up 

prices if there were more competition at the very large level. 

I don’t think the contingent commissions that smaller 

brokerages, like Mr. Soto’s firm, may be accepting at the end of the 

day, because there is so much competition in the marketplace, people can just move to any other brokerage firm, are going to drive 

up prices all that much. But where you have two players with 70 

percent of the market, it definitely could. 

Mr. COUNSELMAN. Mr. Chairman, I think that contingent commissions also drive down prices when they are applied properly because they incent lower loss ratios. They incent my firm and individuals at member firms of the council to go out and find those insureds, those clients, prospective clients, who are interested in controlling their losses and will take the steps, the known steps that 

a client can take to reduce their losses. So when used properly, 

they incent positive behavior. Now, obviously, what has been described earlier today was not incenting positive behavior. 

Senator FITZGERALD. Mr. Hunter, do you believe they incent positive behavior, the contingent commissions? 

Mr. HUNTER. It is possible that they could incent going out and 

finding some better business, but it is also possible it could incent 

holding down claims when they hand it in, so it has both incentives. 

Senator FITZGERALD. Should politicians be raising the issue of 

conflict of interest with anyone when, after all, politicians who run 

53

for office are taking campaign contributions from the very same 

people that they are regulating and passing laws on, correct? 

[Laughter.] 

Mr. COUNSELMAN. We are speechless. [Laughter.] 

Mr. HUNTER. You need to have a hearing on that next. [Laughter.] 

Senator FITZGERALD. We have covered lots of ground. I would finally—we raised the antitrust issue. What about allowing, Mr. 

Csiszar, and I know this is sensitive, what about just allowing the 

FTC to study the insurance industry? 

Mr. CSISZAR. In fact, they are doing a study now, I believe. They 

are doing a study on credit scoring. So they have got their foot in 

the door. I am not sure how they got it in, but——

Senator FITZGERALD. Now, there was a prohibition from 1980. Do 

you think they should be allowed—we should repeal the prohibition 

enacted in 1980 that forbade the FTC not just from enforcement actions with respect to the insurance industry, but from even studying the insurance industry? 

Mr. CSISZAR. I think anybody ought to be able to study it. I know 

that as a regulator, I dealt constantly with GAO on studies. So 

from my standpoint, studying the industry is something that is of 

value. 

Senator FITZGERALD. Does anybody else care to jump in on the 

FTC? 

Mr. HUNTER. The credit scoring study was specifically authorized 

under FCRA. That is why it is an exception to the rule. They can’t 

do anything else. In fact, I sat at a table with the chairman of the 

FTC testifying like this and the chairman was asked about insurance and he said, Mr. Chairman, if I knew the answer to that, I 

would have broken the law, and that is the problem. 

Senator FITZGERALD. Well, listen, you all have been terrific witnesses. I appreciate your candor and your willingness to speak your 

positions very forcefully. 

The record will stay open for 1 week, until the close of business 

next Tuesday, November 23, in case any of my colleagues have any 

written questions they may want to give to you or you have any 

further information that you would like to provide the Subcommittee. 

Thank you all again for being here. I appreciate your patience for 

this long hearing. The hearing is adjourned. 

[Whereupon, at 1:32 p.m., the Subcommittee was adjourned.] 

(55)

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