For the commercial property and casualty, and employee benefits segments of the insurance industry, anti-rebating laws are both nonsense and anti-consumer. Competition is intended to protect competitiveness in the marketplace, not to protect competitors.
Producers need to be able to provide volume-based services to medium and larger clients. It should make no difference whether insurers, agents or brokers negotiate prices to be competitive.
But the commercial property and casualty and employee benefits industries often are effectively barred from providing market competitive services that their clients want and need because it can be impossible to determine whether some aspect of bundled or value-added services will potentially run afoul of a particular state’s anti-rebating rules.
No one wishes to be on the receiving end if a competitor complains to regulators that it lost business to a producer who provided a supposed rebate. This is easy to allege and costly to defend.
Most states deal with rebating as an unfair business practice largely modeled on the National Association of Insurance Commissioners Model Unfair Trade Practices Act. Section H provides in relevant part:
“Except as otherwise expressly provided by law, knowingly permitting or offering to make or making any life insurance policy or annuity, or accident and health insurance or other insurance, or agreement as to such contract other than as plainly expressed in the policy issued thereon, or paying or allowing, or giving or offering to pay, allow, or give, directly or indirectly, as an inducement to such policy, any rebate of premiums payable on the policy … or other benefits thereon, of any valuable consideration or inducement whatever not specified in the policy …or anything of value whatsoever not specified in the policy.”
For larger commercial property and casualty and employee benefits accounts, why must “other benefits,” such as rebates or discounts need to be specified in the policy?
Sky Did Not Fall
California abolished anti-rebating in 1993 with Proposition 103. The sky did not fall. Consumers were advantaged, not harmed.
The insurance markets have changed considerably since anti-rebating laws first appeared on the books more than 100 years ago. Insurance regulators no longer need to protect the small independent agents from larger competitors. Each served entirely different markets.
Nor is there any need to protect insurers from discounting folly that would threaten their solvency. Today’s capital adequacy and other regulatory requirements eliminate the risk of insurer insolvency relevant to rebates or discounting.
The anti-rebating rules have been an anachronism for years. Their continued reach prevents insurance brokers from providing cost-effective services for clients at a time when costs continue to rise, particularly in the employee benefits area.
For state and federal compliance obligations that a brokerage firm undertakes to administer complex employee benefits plans, including health insurance, it should be fairly compensated for those services provided that its compensation is fully disclosed to the client.
In the sophisticated employer community, there is an expectation that their insurance broker can provide all-encompassing, one-stop shopping to reduce their insurance and employee administrative costs. Many brokers and commercial insurance buyers provide services that go far beyond simply placing the insurance as part of a package of bundled services negotiated with the client.
Why should the provision of services be restricted to what the insurance policy says? The policy provides for defined coverage and commission compensation for the producer. Essentially nothing more, nothing less. So long as the producer compensation is fully disclosed to the insurance buyer, it should make no difference how the producer deals with its commission compensation to satisfy the client’s needs.
As a service that clients want, an employee benefits broker should be able to offer IRS Section 125 (discrimination) and Department of Labor Section 5500 form assistance to clients as part of a package of bundled insurance services.
Similarly, where the client desires a comprehensive relationship with a broker, there is no good reason why the broker should not be able to provide even payroll or other services, or refer the client to a preferred provider that offers such services for a discount.
Protect Consumers, Not Competitors
Regulators need to seriously return to protecting the consumer — not competitors — to allow the commercial property and casualty industry and the employee benefits industry, insurers and producers alike, to provide the services that consumers want, need and wish to buy at a competitive price.
It is high time for the National Association of Insurance Commissioners to update the Model Unfair Trade Practices Act to reflect today’s market realities for larger commercial insurance and employee benefits insureds.