Spitzer Effect Could Backfire

Hurricanes, tornadoes, floods caused a tumultuous summer and shaky fall for the insurance industry, but no one could have predicted the results of Eliot Spitzer’s investigations in New York, which now threaten to spill over into other states.

During a panel discussion last month at the Big “I” conference, five CEOs from leading insurance companies voiced concerns about the stability of the industry after massive hurricane damage, see page 7. Most were optimistic about what the future held, but even they must now wonder what fallout will result from the “Spitzer effect” and what its ramifications will cause for insurance companies and the consumers they serve.

Spitzer’s investigation spread like a complex spider’s web, in which more and more people and companies are being ensnared. So far Spitzer has investigated only two insurance industry sectors, mid-sized and excess liability insurance. This most tenuous investigator, however, considers himself the champion of the average person, and promises to follow suit against general insurers.

Insurance agents and brokers I talked to feel that companies cited by Spitzer were acting illegally, and deserve to be penalized. But, at the same time, they believed that some of the practices in question, like contingent commissions, are a totally separate issue. Their biggest worry is that such inquiries could spread to other states and could have long-reaching, dramatic effects on the entire industry. Although such investigations start small, with a few companies, they threaten to engulf entire industries.

As this issue went to press, Southeast brokerages and agencies were closely watching the situation in other states. Spokespersons for insurance commissioners in several southeastern states, however, told me they were concerned about the extra costs that would result for consumers who would end up paying higher costs for life, disability and accident insurance. The long-term effect on consumers could be an increase in policy costs felt by tens of millions of Americans.

Wise insurance commissioners in many states were leaving the matter up to their state attorneys, and following the lead of the National Association of Insurance Commissioners (NAIC). In late October NAIC hosted a conference call for concerned commissioners, and at the same time instituted a working group designed to take a look at the situation and make a policy statement to be followed by ALL commissioners.

Southeast brokers and agencies are closely watching the situation and its ramifications in other states. MGAs are especially worried, because they make most of their income from profit-sharing agreements. Several reported that E&O coverage is already being hit hard by the effects of the investigations and its potential impact on carriers. One obvious result, has been the dramatic fall in insurance stock values caused by over-reacting investors. Many worry about what will happen to their bottom-line if the courts take away profit incentives.

Topics Agencies