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Brokergate: An Inquiry into the Role of Brokers, Insurers, Regulators and Risk Managers in the Ongoing Broker Compensation Scandal and a Review of its Impact on Consumers.


To investigate the oversight of insurance licensees and determine the need for enforcement and legislative remedies in order to restore integrity to insurance markets that have been shaken to their core by the widespread fraud and corrupt practices revealed in ongoing investigations by NYS Attorney General Eliot Spitzer.

Monday, December 6, 2004 - 12 Noon
New York University
Kimmel Center for University Life
60 Washington Square South - Room 802
New York, NY


A circular letter issued by the state Insurance Department on August 15, 1998 (CL 22), cited an "alleged market development that appears to warrant more scrutiny." CL 22 described that development as centering on "an allegation that undisclosed compensation, in addition to commissions, is being paid to brokers by insurers as additional compensation for the placing of business without such information being furnished to insureds." CL 22 stated the position of the department: "the undisclosed receipt of additional compensation is sufficient to create the perception that brokers are conflicted in their loyalties and that such conduct may constitute a violation of Section 2110 as a dishonest or untrustworthy practice."

CL 22 provided new guidance for brokers and insurers, including provisions requiring that: 1) insurers and brokers execute written agreements on compensation; 2) compensation agreements be disclosed to insureds; 3) insurers maintain records of compensation amounts paid and the reasons for such compensation; and 4) insurers develop internal audit procedures regarding the additional compensation payments to ensure that the payments are within the parameters of the New York Insurance Law (NYIL) and department regulations. CL 22 also pledged that the "department will review these matters in future market conduct investigations of insurers and brokers."

In October 2004, Attorney General Eliot Spitzer sued March & McLennan, the nation's leading brokerage firm, alleging that it had steered unsuspecting clients to insurers with whom it had lucrative payoff agreements, and that the firm solicited rigged bids for insurance contracts. Major insurers such as ACE, AIG, The Hartford and Munich American are named in the Attorney General's complaint as participants in the steering and bid rigging. To date, several senior executives have pled guilty to participating in the illegal conduct. According to the complaint, the brokerage firm Marsh & McLennan Companies received the payments for years, and in 2003 alone, collected approximately $800 million in so-called "contingent commissions."

In November, opening a new front in his investigation of fraud and anti-competitive practices in the insurance industry, Attorney General Spitzer sued a leading consulting firm specializing in life, accident and disability insurance, alleging that the company steered business to insurers in exchange for lucrative payoffs and that this practice raised premiums for individual employees. The complaint alleges that the consultant, Universal Life Resources, Inc. (ULR), had undisclosed agreements with some of the country's largest life insurers, including MetLife, Prudential and Unum Provident, under which millions of dollars were paid to ULR in exchange for steering the business of ULR's clients. Spitzer's complaint also alleges that secret fees for "communications services" far above market rates increased employees' costs for important benefits.


  1. What prompted the issuance of CL 22? How was CL 22 an appropriate response to an allegation that "may constitute a violation of Section 2110 [of the NYIL] as an untrustworthy or deceptive practice"? What public policy goal was achieved by, in effect, "blessing" additional compensation arrangements between brokers and insurers through the issuance of CL 22, so long as they were disclosed? Since 1998 and prior to this year, what steps did the SID take to ensure compliance with CL 22?
  2. Attorney General Spitzer's complaints allege that numerous licensees chose to participate in unsavory and illegal practices in order to increase or protect profits, rather than alerting the appropriate authorities and competing for business through price, efficiency and quality service. Other licensees chose not to participate, but apparently "dummied up" when confronted with these fraudulent schemes. Does the NYIL adequately address the obligation of licensees to report illegal activities? Are penalties sufficient to deter this conduct in the future? Are there enforcement mechanisms available which will prevent fines and financial penalties from simply being passed along to consumers?
  3. Should New York State adopt legislation which prohibits contingency payments from insurers to brokers? If contingency payments are permitted to continue, how can businesses trust their brokers to fulfill their responsibility to get them the best deal for coverage?
  4. Has the business community's relationship with brokers changed as a result of the Brokergate scandal? A fundamental principle of the insurance marketplace - brokers put their clients' interest first at all times - has been shattered. What actions should be taken to restore customers' faith in the insurance market?
  5. Commercial insurance purchasers have been battered in recent years by sharp rate hikes for the coverage they need to continue to run their businesses and rent their properties. Insurers and brokers attributed these often astronomical cost increases to "crises," most notably of late the 9/11 attacks. How do such cost increases relate to the hundreds of millions of dollars insurers paid brokers in exchange for placing coverage? Did insurers simply build these costs into their customers' premiums?
  6. What is the status of the SID and Department of Law investigations? What is the likelihood that the same patterns of wrongdoing will emerge in other lines of insurance?
  7. In the past, the Pataki Administration has drafted and advanced legislation to deregulate most commercial insurance transactions, arguing that so-called "sophisticated purchasers" of insurance do not need policy or rate review and other protections provided by the SID. How does this view square with the revelations of the Brokergate scandal?
  8. Attorney General Spitzer's investigation alleges that millions of dollars changed hands illegally under the noses of State regulators, business executives and highly-trained risk management specialists. How was this possible? What implications does the Brokergate scandal have for state-based insurance regulation?

See below for hearing instructions and registration information

Persons wishing to present pertinent testimony to the Committee at the above hearing should complete and return the reply form below as soon as possible. It is important that the reply form be fully completed and returned so that persons may be notified in the event of emergency postponement or cancellation.

Oral testimony will be limited to ten minutes' duration. In preparing the order of witnesses, the Committee will attempt to accommodate individual requests to speak at particular times in view of special circumstances. These requests should be made on the attached reply form or communicated to Committee staff as early as possible. In the absence of a request, witnesses will be scheduled in the order in which reply forms are postmarked.

Ten copies of any prepared testimony should be submitted at the hearing registration desk. The Committee would appreciate advance receipt of prepared statements.

In order to further publicize these hearings, please inform interested parties and organizations of the Committee's interest in hearing testimony from all sources.

In order to meet the needs of those who may have a disability, the Assembly, in accordance with its policy of non-discrimination on the basis of disability, as well as the 1990 Americans with Disabilities Act (ADA), has made its facilities and services available to all individuals with disabilities. For individuals with disabilities, accommodations will be provided, upon reasonable request, to afford such individuals access and admission to Assembly facilities and activities.

Alexander B. Grannis
Member of Assembly
Committee on Insurance


Persons wishing to present testimony at the public hearing on Brokergate are requested to complete this reply form as soon as possible and mail it to:

Renee Skorupski
Committee Assistant
Assembly Committee on Insurance
Room 520 - Capitol
Albany, New York 12248
Email: skorupr@assembly.state.ny.us
Phone: (518) 455-4928
Fax: (518) 455-5182


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