In recent testimony before a Senate subcommittee, New York Attorney General Eliot Spitzer complained that "favoritism, secrecy and conflicts" rule the insurance industry. He says that about other financial businesses, too, particularly when middlemen (brokers) are involved. But favoritism, secrecy and conflicts amount to little more than name-calling -- subjective opinions, not proven crimes.
Spitzer went on to explain how his latest investigation of the insurance industry relates to his previous accusations of bias among stock analysts and his fetish with active trading in mutual funds. "Similar to the small investor on Wall Street or in mutual funds," he said, "the ordinary purchaser of insurance has no idea that the broker he selects is receiving hidden payments from insurance companies, that the advice he receives from the broker may be compromised ..."
Spitzer divined "a very familiar pattern" among his highly publicized assaults against stockbrokers, insurance brokers and mutual fund brokers, such as "inadequate disclosure." The familiar pattern is not really in the way these industries go about their business, however, but in the way Spitzer goes about creating an illusion that his unproven accusations involving a few people in a few firms are symptomatic of some industry-wide "scandal" or "corruption."
A state attorney general ought to take criminals to court, where they have the right to defend themselves. But crimes are committed by individuals, rather than by entire industries, and courts are a nuisance. There is far more publicity to be had by re-labeling longstanding, voluntary business arrangements as "corrupt."
Fraud is a crime. Bid-rigging is a crime. But "secrecy" and "conflict" are imaginary crimes. One could as well accuse Spitzer of inadequate disclosure, because he carefully avoids the sunlight of public trials in favor of the secrecy of deal-making and plea bargains. One could also accuse Spitzer of a conflict of interest -- selecting "investigations" on the basis of publicity value in preparation for running for higher office.
The New York prosecutor's latest accusations about insurance brokers have been criticized by myself, Henry Manne and William Holstein in separate Wall Street Journal op-eds. What I want to do here and now is highlight three themes common to Spitzer's attacks on financial industries.
The first theme is that buyers of financial services are assumed to be extraordinarily ignorant and gullible. This assumption is particularly implausible in his complaints against insurance brokers Marsh & McLennan and Universal Life Resources (ULR). A fawning piece in Fortune claims Spitzer is "invariably on the side of the little guy." In ULR's case, these "little guys" include Intel, Colgate-Palmolive, Eastman Kodak, Marriott, United Parcel and Dell. These are scarcely innocent babes in the woods.
Corporate insurance clients can switch brokers or deal directly with insurance companies. Spitzer's Senate testimony cited a private estimate that "Marsh and AON together comprised 54 percent of the global brokerage market." But the relevant market is for insurance, not brokerage, and a fourth of property and casualty insurance is sold without brokers.
Spitzer's complaint against ULR inadvertently demonstrates ample competition among brokers -- noting Met Life "had override agreements with at least 60 brokers." The mere presence of such an agreement with one of those many brokers does not automatically "steer" business toward Met Life, since other brokers and insurers have similar agreements.
The fact that most corporations have chosen to use a broker rather than deal directly with insurers proves that brokers are providing useful services and negotiating better deals. "Conflict of interest" does not depend on whether brokers are paid by sellers or buyers, because any broker who did not continually earn a good reputation by taking care of customers would soon lose clients to those who do. Insurance companies have no incentive to pay contingent fees to brokers who cannot attract and retain corporate customers for their policies.
Spitzer's second major theme involves loose, subjective accusations of "inadequate" disclosure by middlemen. Consider Spitzer's allegations that ULR "generally" failed to provide clients with "appropriate" or "adequate" disclosure of fees received from insurers. His complaint says ULR "fails to meaningfully disclose the substance of its agreements." Yet "meaningfully" turns out to mean, "ULR has never explained to its clients how overrides and other undisclosed payments might influence its professional advice."
By this peculiar standard, travel agents would be expected to tell travelers that fees they receive from airlines and hotels might influence which vacation they are advised to take. And realtors would be expected to tell homebuyers that fees they receive from the sellers of homes might influence which homes they are steered to.
Perhaps waiters should be required to warn prospective diners that they are biased toward recommending meals and wines the restaurant is eager to sell, because they are not wholly compensated by tips. There are many such conflicts that Spitzer is doubtless eager to investigate.
Spitzer's definition of "meaningful" disclosure proves these payments by ULR were in fact disclosed, since there would otherwise be no need to explain them. The complaint adds that "disclosures have been misleading." But disclosures that are repeatedly described as misleading, inadequate or inappropriate cannot also be described (as the complaint often does) as "undisclosed."
An agreement with one client, according to the complaint, "does not explain that ULR's receipt of override payments are based on whether business is placed with a particular carrier." Paternalistic nonsense. Everyone knows insurance companies don't pay contingent commissions on policies placed with some other company. No state regulator has ever found anything wrong with this. But Spitzer has once again appointed himself the nation's regulatory czar, legislator and judge.
Spitzer's third theme is that any broker payments from sellers are "essentially kickbacks" and "inherently corrupt." This implies brokers should only be paid by buyers, to eliminate "conflict of interest" (another subjective impression being criminalized by prosecutorial fiat). But if buyers really preferred to pay for all consulting and brokerage themselves, then seller-paid commission would not have become the norm in such services -- such as realtors, travel agents and employer-financed employment services.
Spitzer too often tries to dictate how others are paid -- from washroom attendants and stock analysts to the employment contract of the former head of the New York Stock Exchange, Dick Grasso. This, too, is not his job. Being elected state attorney general did not entitle him to act as national compensation czar.
All examples of ULR contracts in the complaint demonstrate that clients were offered a choice of at least three insurers. Insinuations of ULR favoritism toward certain insurers do not convincingly demonstrate that those favored insurers were able to charge higher premiums.
On the contrary, ULR is accused of steering business to MetLife, but only if "MetLife priced competitively." The complaint that "Aetna has had virtually no success in securing new business where ULR is the broker" suggests Aetna (the "little guy"?) was allowed to bid but was rarely competitive.
Whenever Eliot Spitzer announces his next "corporate scandal," he is likely to stick to his proven formula of demonizing "secrecy" (no amount of disclosure is ever enough) and "conflict" (he objects to brokers being paid by sellers). Will the media fall for it again? If some enterprising reporter ever tries to tally up the costs and benefits of Spitzer's crusades against financial industries, the conclusion is sure to be that these capricious episodes of trial-by-press have done a little good and a lot of damage -- particularly to the little guy.