Even if no further allegations surface about insurance broker misdeeds, the employee benefits arena will be a bubbling pot for months to come. Most of the litigation focuses on the property and casualty side of the equation, and the leaders Marsh and Aon, which brokered coverage for roughly 70 percent of the property and casualty group market.
Meanwhile, a second round of litigation is targeting employee benefits broker Universal Life Resources, a group life, accident and disability consulting company, and its subsidiaries.
The smaller size of U.L.R.--2003 income reported at $25.3 million--suggests a smaller impact coming out of suits by New York State Attorney General Eliot Spitzer, California
Insurance Commissioner John Garamendi and several class-action suits filed on behalf of employees.
Yet these high-profile suits by states and groups representing employees still could swing some major impact in the employee benefits arena. They target brokers and also an A-list of defendant carriers with major market shares: Aetna, Cigna, MetLife, Prudential and UnumProvident. The suits name as victims a list of prominent employers that include BP-Amoco, Brinker International, Colgate-Palmolive, Dell, Intel, Kodak, Marriott, Micron, UPS and Viacom. Although employers are listed as victims, they have numerous options outside litigation.
The Spitzer suit and an article in The Wall Street Journal suggest a U.L.R. model that:
-Charged carriers excessive contingent commissions or override payments in return for access to the largest employers.
-Charged excessive per-employee "communication fees."
Spitzer's suit and class-action suits against U.L.R. are still pending. Garamendi's consent decree with U.L.R., requiring it to end the alleged practices, ensures U.L.R.'s cooperation in his continuing suit against all the above-named carriers except Aetna. U.L.R. has announced it will implement a high standard of disclosure best practices.
DUCK! AND AUDIT
Throughout this drama, employers are keeping a low profile. Accusations of broker misconduct surfaced during open enrollment season, just as employers were working hard to sell programs that shift health care costs to employees. Corporate governance scandals have also kept corporate contracts under the microscope, with shareholders more likely to attack any whiff of malfeasance.
"I think all of us are nervous because of (the) Sarbanes-Oxley (financial reporting requirements)," said a director of benefits for a U.S. retailer with 50,000 employees. "We don't believe that these practices were happening on the health and welfare side, but we're documenting. We're going to contact all of our books of consultants and plan vendors and ask them to certify to us whether they paid any of these commissions or fees, if they collected any of this, and if so did they pay it out."
In her case, the programs targeted for the first look are the voluntary life insurance programs with age-based rates, and the administrative costs to employees for the 401(k) plan.
Only two employer human resource professionals spoke on the record. Madeline O'Connor, assistant director of benefits for Ohio State University, said her organization uses consultants for procurement. Sherry Schumacher of Eugene Water & Electric Board in Eugene, Ore., said that her organization, like many public sector employers, is mandated to use a highly transparent process involving open Requests For Proposals for their coverage.
The combined loss to employers and employees of U.L.R.'s alleged practices is estimated by John Stoia, a partner in Lerach Coughlin and lead attorney in several class action suits against U.L.R. in the "tens of millions to hundreds of millions of dollars."
Although employers may have sustained the larger loss to U.L.R. in total dollars, none has signed on as a plaintiff in the higher-profile suits as of this writing.
DRIVEN BY P&C EVENTS
Much of the action in the employee benefits markets is driven by earlier events in the property and casualty markets.
"Spitzer's investigations began getting some press last spring (2004) ? We started getting calls from small business owners who had been (harmed) by generally either Aon or Marsh steering them to the wrong (property and casualty) policy for their needs, then the carrier wouldn't pay when they made a claim," said Amy Bach, executive director of United Policyholders.
Bach's organization started talking with class action law firms. They retained Lerach Coughlin, even though the resulting suit focused on an employee benefits broker, ULR. Garamendi also retained Lerach Coughlin.
Although most employers contacted for this article focused on full disclosure and weren't categorically opposed to contingent commissions, Bach wants the commissions discontinued altogether.
She cited a scenario, more likely to occur in property and casualty, where an insured calls the broker first to start a claim and the nature of the contingent commission contract incentives encourage the broker to deny the claim in order to increase its commission or win the renewal at the end of the year.
She also noted that using a consultant rather than a broker is no guarantee of avoiding commission conflicts, because some consultants also have broker's licenses.
Employers, however, aren't stampeding to replace brokers with other procurement models.
A mid-November "Webinar" by the National Business Group on Health attracted more than 70 major employers to discuss the broker litigation and its impact. One participant described the response.
"At the end of the call, there were two questions, and neither was stretching around the issue of 'should I do something.' There was just kind of a silence ... Our consensus was ... that people are taking a wait-and-see attitude, but the problem is there's not a lot of information available. You've got to have some trailblazers--those employers that were forced into doing something because they were named in the (Spitzer) suit (as victims)."
Three years ago the benefits director for the large retailer replaced brokers with a consultant for procurement. She was an early adopter of a new Web-based vendormanagement system, IE-Engine.
In their model for using the system, "Everything is documented. Who did what, on what date, at what time, all the communication," she said. "You prohibit your brokers or consultants from having communications outside of the IEEngine tool, you force everybody in, and it's all documented, so you couldn't have the bid-rigging."
Many employers may not be ready to consider new procurement strategies yet, however. Consultant Ted Chien of Watson Wyatt's Minneapolis office hasn't seen much employer interest in shifting from brokers to consultants.
He uses IE-Engine with about 100 clients ranging in size from about 5,000 to 10,000 employees, and the largest having more than 100,000.
"We've seen a trickle of shifting," he said, "but once a person at a broker or consultant earns a client's trust, the client tends to keep the business there until they're given significant reason to move."
But will a trusted broker still be at the firm the next time a client calls?
Several factors could increase employee turnover and clients may find their broker no longer "works at this office."
Marsh, Aon and Willis have all announced they will discontinue contingent commissions, effectively removing the practice from most of the property and casualty and employee benefits markets.
U.L.R. and some other secondtier brokers have done the same. Since the commissions generated half or more of the revenue for some brokers, they may be forced to restructure their employee compensation which could create challenges with employee retention. "We're going to see more of that first," Chien said, "before we see the employer market making any major shifts in who they're doing business with."
Because so many brokers serve both markets, other projected property and casualty trends may spill over into employee benefits as well.
A poll of attendees at The Conference Group's 16th Annual Executive Conference for the Property-Casualty Industry found 46 percent of attendees predict broker/agent compensation in 2005 will be straight commission with expense reimbursement. An additional 40 percent predicted straight commission with no volume-based component.
Many attendees also expected shifting market share among the top five brokers. Willis, the No. 3 broker, could be the biggest winner.
The survey also found 42 percent of the attendees predicting intermediaries (including brokers) will lose market share.
In addition to some brokerage clients defecting to consultants, Chien speculated that some carriers may develop in-house commission sales forces. These factors could create a chaotic employee benefits marketplace in 2005.
Further compounding stress on the markets are the aggressive attitudes by several states' insurance commissioners, requiring carriers to quickly sort and deliver an avalanche of data.
To make this process easier for carriers, the National Association of Insurance Commissioners has encouraged state insurance commissioners to use a single template inquiry form and to share information rather than hitting carriers with multiple requests for the same information. Nonetheless, some states follow their own process for investigation, notes Scott Holeman, communications manager for NAIC.
NAIC enacted amendments to its Producer Licensing Model Act to include disclosure standards regarding contingent commissions. Individual states may rely on these standards to inform legislative efforts. NAIC also launched an online insurance fraud reporting system for employees and other consumers wanting to report suspected fraudulent activity, at https://external-apps.naic.org/fraud/ofrs entry.jsp.
The benefits director quoted above provided a good first step for employers, especially at publicly held companies: first do an audit of contracts to uncover contingent commissions, before deciding if any significant changes to procurement strategy are necessary. Professional and industry associations are earning their dues as they help members sort through the fallout of broker misconduct.
a writer living in Oregon, writes regularly about benefits issues for Risk & Insurance®.
June 1, 2005
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