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Regulatory Attacks On Incentive Broker/Agent Commission and Fee Deals
There has been a significant amount of “press” over the past several months concerning the legal issues several insurance producers and reinsurance carriers are involved in relative to the disclosure of compensation arrangements. While the New York State Attorney General Elliot Spitzer has been “leading the charge” on these issues he is being joined by State Attorney Generals, individual State Insurance Commissioners, the Federal Government and the National Association of Insurance Commissioners (NAIC). The following article written by Andy Bernstein, our General Counsel provides you with an overview of the issues and some possible outcomes for the insurance industry. We at WSP and Assurant Employee Benefits are monitoring this situation closely and will provide you with updates as it progresses.
Re: Update – Regulatory Attacks On Incentive Broker/Agent Commission and Fee Deals
Date: 11/29/04
This memo summarizes the legal problems that State Insurance Departments, Attorney Generals and Federal regulators have with the long-standing insurance industry practices of paying extra or incentive compensation to brokers for the sale of life, health, disability, property and casualty policies, and suggests possible results of these investigations.
o The Biggest Potential Problem: In the ongoing investigations, State Insurance Departments and AG’s have accused brokers and agents, who fail to disclose to their client before the purchase of the insurance policy, all of the commissions, fees and other compensation that they will receive as a result of the sale, of committing fraud and violating their duty to act solely in the best interests of their clients, the policyholders. In our judgment, this is the single biggest issue in these investigations and the 1 issue that is likely to result in specific changes to the rules of conduct for brokers and agents.
o The State and Federal regulators investigating these issues have stated that they think compensation arrangements between insurers and brokers or agents that are not disclosed to the customer “distort the behavior” of the broker/agent; and lead to a broker or agent illegally “steering” his/her customer to a particular insurer’s policy simply because it gives the broker/agent the biggest financial pay-off.
Probable Result And Our Recommendation: States are likely to adopt new broker and agent disclosure laws, requiring each broker and agent (1) to disclose to the customer before the insurance policy purchase decision is made, all compensation he/she will receive from the sale of the policy from this particular insurer; and (2) to recommend to the customer the “best available policy,” based on a variety of factors. California has already passed this exact law.
Another Possible Outcome: States may pass new laws requiring insurers to work with brokers and agents with who commit to doing these types of “up front” disclosures.
Based on this analysis, we think:
A. Up-front disclosure to the prospective policyholder of the broker’s and agent’s fees and commissions should be the standard of good practice in the industry.
B. Insurers should work with brokers and agents to help them serve the needs of the customers and the industry by putting into place fully disclosed fair and reasonable commission and incentive compensation practices.
C. During the period in which the issues become clearer and the resulting new industry rules are developed, insurers and brokers would be well advised to seek their own legal advice on all of these issues.
Thank you.
[PRINTER FRIENDLY VERSION]
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