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Independent insurance brokers across the country are bracing for what they see as an inevitable--and financially damaging--consequence of New York Attorney General Eliot Spitzer's crusade against the industry: lower commissions from the larger insurers they do business with.

Plus, for small agencies, the slew of Spitzer-inspired actions against larger insurers couldn't have come at a worse time. For this is the season in which insurers traditionally calculate the yearend "bonuses" they pay the smaller agencies that feed them business. (These bonuses from insurers are usually based on the surplus remaining after premium revenue for the year generated by the small broker, minus premium income losses.)

"You can count on insurers to use Spitzer as an excuse to pay mom-and-pop agencies like ours less commission," said this owner. "They'll do anything to protect their bottom line."

As for the traditional yearend performance bonus, he said, "They (the insurers) nickel-and -dime us every year, anyway. Now who knows what's going to happen."

There's another revenue-generating front insurers are likely to become more aggressive about--and an area they've already pushed relentlessly on in the past three or four years: that is to continue to pile on service charges, says this broker, who runs a property-and-casualty agency with his wife and her father.

"Most policyholders, businesses as well as individuals, often don't scrutinize the bills they receive from their insurance company," said the broker. "But if they had been examining their bills closely, they would have noticed all sorts of exorbitantly high service charges."

For example, he said, "If people are on a monthly payment plan and they don't pay on time, they (the insurance company) can whack you with a late charge as much as $20 to $25." A more insidious practice that most consumers don't know about until it's too late, he added, is one in which any service fees on a payment are deducted from the payment before applying a check to the amount due. This can sometimes cause a violation of the insurance policy and lead to a messy cancellation situation that takes time and additional money to restore.

A DEATH FORETOLD?

Why have these practices escalated only in the past three or four years?

"Remember that most of the largest insurers have financial operations far outside just strictly insurance," the agency principal said. "Reaching for ever-higher profits has made them greedy, in an almost desperate way, which is dangerous for us and our clients. Unfortunately, we cannot control these extra cost burdens that our clients have to deal with."

Of course for the small agencies, and even larger insurers with which they do business, there are several other disquieting fears stirred by Eliot Spitzer's oft-quoted statement that in light of illegal activities at Marsh & McLennan, Zurich American and numerous other giant brokerages and insurers, the industry is likely to need an entirely new model for conducting business.

"More and more, people are going to be asking, 'Do you really need a middleman?" noted an attorney who is very familiar with insurance companies under investigation by Spitzer and other law enforcement agencies and insurance regulators. "People are bound to look more closely at companies like GEICO that sell policies directly through their own sales staff."

Also, this attorney underscored, "there are hundreds and hundreds of insurance options available directly via the Internet. It's staggering to see how many insurance possibilities have opened up on the Internet in just the past few years."

(An Internet search under "insurance brokers" brought 6,180,000 responses; an "insurance quotes" search elicited 17.3 million responses. Most major insurers, of course, have an extensive and sophisticated presence on the Internet in this important competitive arena.)

"The long-standing role of the middleman will not whither away," this attorney also said. "But it does mean they're going to have to bring more to the table than ever before. Large companies will always need expert advice from middlemen of various sorts, but the service must be comprehensive and honest.

Then, too, there will always be the need for insurance advisers who are experts on specialized forms of insurance. Overall, the key to successful insuring in the future will be to serve a client's best interest as never before."

STEVE YAHN lives in Croton-on-Hudson, N.Y.

January 1, 2005

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