Trust Your Broker

Speaking at an international conference in a far-off locale, while your remarks are translated into multiple languages, is trippy.

This is especially true for a guy who barely escaped the University of Mississippi with a liberal arts degree eons ago. But I found myself doing just that a couple months ago in Dublin, at the annual conclave of BIPAR, the European federation of insurance and financial intermediaries.

These are my counterparts, wonderful people all (albeit extremely agitated at the current occupant of the Oval Office). The Council of Insurance Agents & Brokers shares many members with BIPAR, along with similar regulatory and legislative challenges. But I’m reminded of the John Travolta line in Pulp Fiction: “But you know the funniest thing about Europe is? It’s the little differences. I mean, they got the same s— over there that they got here, but it’s just, it’s just, there it’s a little different.”

Both continents have been worked up for decades over the agent/broker compensation model, but they have dealt with it very differently. European Union regulators and bureaucrats addressed the BIPAR audience about their ongoing work to police compensation, and the audience politely applauded. Each regulator was thanked for their leadership and thoughtfulness and openness and cooperation and so on. But the American in me was shifting uncomfortably in my chair, because here’s what their speeches sounded like in my head: “We all know that broker commissions constitute a conflict of interest, are at fundamental conflict with your customers, and here’s our 15-point plan to rein them in.”

While The Netherlands and other EU nations prohibit or heavily regulate commissions on complex financial products, only a minority of progressive state insurance regulators have followed suit in the United States. This country generally permits such compensation while imposing safeguards designed to prevent those commissions from influencing recommendations. The National Association of Insurance Commissioners’ model law (mostly adopted but frequently adapted in the states) requires transparency, documentation, conflict management, insurer supervision, and demonstrable best-interest recommendations for carrier coverage. The result is a framework that preserves consumer access to commission-based advice while reducing the risk that financial incentives will outweigh client interests.

The U.S. and European approaches to minimizing conflict of interest may seem like a distinction without a difference. But it feels like a profound divergence, one that agitates me. For one, the laws in the European Union and many other countries demonstrably have deterred consumers from seeking financial advice once they had to pay advisors directly. But more broadly—dare I say it—why is “steering” such a dirty word when it comes to directing a client to the best coverage option? I’ve been in rooms with thousands of brokers who have spent years, even decades, building relationships and trust with carrier partners. Since when is this business all about price (and inherent producer compensation), notwithstanding an insurer’s claims-paying ability, claims-paying reputation, and both tangible and intangible value? Many international regulators start with an assumption of broker greed, but that flies in the face of what I know to be true about the overwhelming majority of brokers whom The Council represents.

Let me wipe the sweat off my brow about these bureaucrats across the Atlantic.

The Ethics of Insurance

I’ve written before about my grandmother’s difficult life in the foothills of Appalachia in northeast Mississippi—the poverty, the deaths of her husband and both of her children.

As Mary Etta Wood Brown’s four grandchildren settled her affairs following her passing in 1990, I discovered it was worse than we knew. The overwhelming majority of her financial documents consisted of insurance correspondence. It didn’t take long to determine that she had fallen victim to a salesman who had sold her all manner of unsuitable, redundant, and ridiculous policies: cancer insurance, “catastrophic gap filler” insurance, worthless whole life, flipped several times. On and on. She also had saved warnings from a couple of insurers that her agent was churning policies for those lush first-year commissions. It was clear that my grandmother didn’t want to be a financial burden to anyone in her family, and she spent her Social Security check and everything else on insurance policies. It was heartbreaking.

My friend George Dale, then the Mississippi insurance commissioner, helped make sure the insurance agent lost his license. But he added ruefully to me that there were countless dirtbags like that agent, almost impossible to fully root out of the business.

I could have sued that guy, whose name I am grateful to have forgotten, but nothing would have given my grandmother justice. I remain regretful that I did not intervene while she was alive.

This story might seem like an argument in favor of Europe’s approach to regulating broker commissions. But I believe multiple things to be true. Insurance is a promise to pay, but it also is a promise of integrity. Ethical standards must be policed and upheld. Regulators and legislators are necessary, and violators must be prosecuted out of the business. Some products need a high standard of scrutiny.

Nonetheless, the leading commercial insurance brokerages are exemplars of the highest standards, and I am enormously proud of them. Fiduciary standards are a slippery slope and an invitation for litigation and diminishment of the vital role of professional advice (that’s a whole other column). American regulators generally start from the premise that brokerage and its compensation model are good; Europeans are more skeptical of the model. I love my counterparts around the world and learn much from them, but on balance, I’m glad I am on this side of the regulatory pond.