Political Wannabe..?

Public champion or opportunist? Big, bad industry or an “easy target”? The public furor created by New York’s attorney general Eliot Spitzer as a result of his investigation into certain types of remuneration paid by insurers to brokers and alleged “bid rigging” in the placement of business, could not have come at a worse time for the insurance industry. With public outrage relating to premium increases introduced by companies over recent years still fresh in the minds of regulators and the media, the latest blow to the industry’s image seems almost uncanny in its timing. Coincidence? Or, an opportunity seen by an individual to achieve a quick political gain?

With his eye set on the political seat of governor of New York, the motivations behind Spitzer’s investigation into the insurance industry are suspect – particularly in light of how he has acted against the alleged offenders. Instead of pressing criminal charges in the alleged incidences of “bid rigging”, Spitzer filed civil actions against the parties in question, with settlements achieved out of court (hardly what would be expected of a hardy crusader seeking true justice for the people).

George Cooke, president of The Dominion of Canada General Insurance Co., made the following observation in a recently aired “Report On Business” television program, “if his [Spitzer] motivation was to clean up something bad, I’m all for that…I don’t like the way he chose to do it.” Cooke notes that Spitzer could have pressed criminal charges against the alleged wrongdoers, which would have been the appropriate course of action, but did not do so. “Instead, he [Spitzer] has destroyed hundreds of millions of dollars in shareholder capital [in the insurance industry through damaged investor confidence] because of the unfortunate, or improper, actions of a small number of people. So, Spitzer shouldn’t come out of this looking like a god, he should come out of this looking like a self-interested political wannabe,” he adds.

From a relatively “nobody” to overnight fame – with some media even portraying him as the modern version of “super G-man” Eliot Ness of “The Untouchables” (which more than likely was inspired by Spitzer’s own public relations spin-doctors) – to even the casual observer it seems that the “G-man” has used the insurance industry as a publicity stepping stone. With Al Capone dead, Martha Stewart baking cakes in prison, and the broader issue of tighter corporate governance of public-traded companies already tied with a neat bow under the Sarbanes-Oxley Act, it appears that Spitzer needed another quick and easy target to boost his public image as the tough law enforcer.

And what better a target than the insurance industry which every lawyer knows will roll over with its paws in the air and whine rather than put up a good fight. The traditional acquiescence of insurers in settling legal disputes rather than engaging in a court battle is just one way the industry has shot itself in the foot in reacting to Spitzer’s charges (all of the parties that Spitzer has thus far filed a lawsuit against have agreed to monetary settlements as protection against criminal charges being filed) rather than using the opportunity to clarify their legal innocence. As such, the industry’s obvious lackluster determination at defending itself before Spitzer will no doubt attract other wolves on the prowl – a survey of attendees at the recently held Joint Industry Forum (JIF) suggests that over 90% of insurer senior management believe that investigations similar to that of Spitzer by state regulators and attorneys general of the insurance industry will increase this year (see article on page 20 of this issue for further details).

Insurers also shot themselves in their other foot by having left the door open for someone like Spitzer to come along and point a finger at a long-standing, but somewhat vague industry practice such as broker contingent commissions, which are not understood by the public and can therefore easily be portrayed as something underhand. And, as the payment by insurers of contingent commissions is well known throughout the industry, as well as the risk management community and regulators, this would be an easily identifiable and very juicy target for someone on the hunt to make political hay. With the intense regulatory scrutiny on corporate governance over recent years, and the new disclosure rulings that have evolved, it is therefore bewildering that insurers left something like contingent commissions – which could be pointed at as being “hidden payments” – so unattended without a set policy of disclosure requirements (even though risk managers through the Risk and Insurance Management Society (RIMS) having been biting at the bit on this issue for years).

Have insurers learnt anything from Spitzer? Maybe, but the damage has already been done. While the insurance industry in Canada was quick to react to the contingent commission controversy by establishing a “consumer code of rights and responsibilities” along with broker fee disclosure guidelines, the fact is the public – whether they be individual or commercial insurance buyers – will see the media attention around Spitzer as verification of whatever the man says – particularly since he has not been challenged. Regardless of being north or south of the border, the insurance industry has lost further “public face” as a result of Spitzer. Perhaps it is time insurers took a stand to defend themselves, despite the political toes that might get stood on.