Insurance Commissioners Demand Transparency In Broker Relationships

Insurance brokers match companies seeking to buy insurance with insurance providers that have the best offerings. That's the way it's supposed to work, anyway. But in October, New York Attorney General Eliot Spitzer and other law-enforcement officials alleged that some brokers are steering their clients to insurance providers paying the highest commissions. The ensuing investigation led to a shakeup at broker Marsh & McLennan Co. and a call for greater disclosure during the bidding process.

On Friday, a task force formed by the National Association of Insurance Commissioners will submit the second draft of legislation that would require greater transparency into the relationships between brokers and insurance providers. The insurance industry is regulated by state commissioners rather than the federal government, so any proposal passed by the commissioners' association is likely to carry a lot of weight.

While today there's no law compelling brokers to invest in technology that will let them better track their interactions with insurance providers, this is going to change in 2005, says Dave Oberkircher, a principal with broker Trion Group Inc. "We want to be able to document to the customer that the right business decision was made for our customers," he says.

While legislation and regulation haven't had much affect on Trion's technology investments in the past, "this is going to change as there is a greater requirement for transparency and a greater requirement for auditing transactions," Oberkircher says.

These requirements, which the National Association of Insurance Commissioners could finalize by the end of the year and begin enforcing early next year, would have a significant impact on IT's role in the insurance industry, agrees Jann McCully, CIO of insurance broker ABD Insurance and Financial Services, a subsidiary of financial-services firm Greater Bay Bancorp. "The fact that [the commissioners' association] is pushing for transparency means that's what's coming."

Trion and ABD are looking to leverage their existing investment in hosted software from BenefitPoint Inc. to keep up with compliance mandates. Trion has been a BenefitPoint customer for four years and uses BenefitPoint's Aptus software to automate its recordkeeping and transaction reporting. The insurance broker also is looking to use Aptus to automate the request-for-proposal process with insurance providers by tapping into their pricing systems, Oberkircher says. This would transform a traditionally paper-based process and help Trion and the insurance providers keep digital records of their interactions.

Since 2002, Aptus has featured an activity log that captures, stores, and reports on data exchanges between brokers and insurance providers, says BenefitPoint founder Kurt de Grosz. The company is expanding its catalog of application programming interfaces to let users connect different applications into Aptus.

ABD hopes these APIs will better integrate data from the company's benefits brokering and property and casualty insurance business lines. "This is important for providing us with a complete view of client base," McCully says. "If we look at a client from only one silo, we're only getting half the picture."

The ability to create more efficient, better-integrated IT environments could play a critical role within the insurance industry if it becomes more strictly regulated. Demands for data transparency are likely to change how brokers charge fees, Oberkircher says, meaning that the disclosure of fees paid by insurance providers to brokers is likely to dissuade insurance customers from paying high fees for broker services. This could drive down profit margins for brokers, who claim that margins are already thin.