New York Requires Agents to Reveal How Much They’re Paid

Agents Balk at Plan, But Consumer Advocates Say New Rule Doesn’t Go Far Enough

New York insurance regulators have recently unveiled new regulations that will require agents to reveal to their clients how much money they get paid.

The proposal, set to go into effect next year, has infuriated insurance agents, rallied consumer protection advocates and is proving to be one of the more divisive issues confronting Main Street insurance agents in recent memory. And according to some, it’s a debate that agents everywhere should be following closely.

At issue are some fundamental concerns about the very nature of the insurance business, and the transparency under which it operates. Those concerns are rooted in the sins of the recent past. Beginning six years ago, many of the biggest brokers and insurers in the land — names such Marsh or Willis — were forced to pay huge settlements or wage costly legal battles over the payment and acceptance of so-called contingent commissions, essentially bonuses paid for a volume of profitable business.

Those sins are still being felt. Last quarter, for instance, Marsh’s bottom line took a $435 million hit over charges related to the settlement of a 2004 case over contingent commissions and bid-rigging.

But Main Street agents counter that their businesses differ fundamentally from those of the big guys. A small insurance operation, they say, lacks the market clout of the big broker and deals almost exclusively with issues where contingent compensation, bid-rigging and the ill-effects of a lack of transparency have no meaningful effect on transactions. To the contrary, they argue, tracking and reporting compensation to clients will add a huge burden in terms of cost, lost time and unnecessary confusion.

Legal Fight Brewing

That’s a big deal any time, but doubly so when the country is mired in a lengthy economic slump, a prolonged soft market for insurance and businesses are closing or downsizing at near-record rates.

One trade group, The Independent Insurance Agents and Brokers of New York (IIABNY), has pledged to sue the state and is in the process of filing a legal challenge to stop the New York Insurance Department from implementing the regulation. It first threatened the lawsuit last year, when early — and more restrictive — versions of the final regulation had been proposed by the state. “The rule would place an undue burden upon its members for no justifiable reason,” IIABNY said in a statement issued to reporters.

The group’s president and CEO, Dick Poppa, said “IIABNY has a responsibility to represent and to protect the interests of its members, and our members have unanimously and vociferously told us that this rule is unnecessary, ineffective and overly burdensome to their businesses. We cannot sit back idly and let the department impose an unnecessary rule that will only serve to add another time-consuming and costly requirement for our members, which in turn could also result in additional costs to consumers.”

It matters little to the group that the final regulations approved by the department are actually somewhat watered-down compared with earlier proposals.

Changes Made

For instance, regulators had originally wanted agents to provide written descriptions of their compensation for every policy they wrote, including renewal business. The final version dropped those requirements, instead formalizing a two-stage process where an agent discloses orally whether the agent represents the buyer or seller. If asked, the agent must then provide details of his or her compensation. Disclosures would not be required on renewal business, although agents will still have to detail their pay for a policy if a renewal customer asks.

IIABNY Spokesman Tim Dodge said the final regulations “definitely made a movement toward easing the cost impact on producers. It still represents a cost, no doubt about it, but not as severe as what we were looking at in December,” when the previous proposal of the rules was released. It appears it was not close enough, however.

The “Big I” is not the only trade group up in arms about the proposal. The Professional Insurance Agents of New York (PIANY) has also been highly critical of the department’s proposal, arguing that the rules are unnecessary, confusing and would create a whole new array of problems for insurance agents.

Matthew Guilbault, director of government and industry affairs at PIANY, said the rules “present more questions than answers,” a problem he says is “reflected in the department’s intention not to actually enforce or implement the rules until January 1.”

Compliance issues are among the most significant, he said. The technical specifics of just what constitutes “compensation” — be it incentive programs or other indirect compensation paid by insurers — is still not settled as a matter of regulation. Plus there is no clear guidance of how and what exactly an agent must keep as a matter of record to prove that he or she made appropriate disclosures about compensation.

“The devil’s in the details in terms of how difficult compliance is going to be,” he said. “There are a lot of issues out there that we have to work out, but it suffices to say we still have concerns about the burden on our members.”

PIA President Kevin Ryan, an agent in Kingston, N.Y., said the regulations are most likely going to affect agents mostly from a procedural standpoint. Agents, he said, have no reluctance to share information with clients if they are asked, but many agents have concerns around the mechanics of record-keeping and day-to-day operations.

Not All Bad

But not everyone thinks the regulations are a bad idea. In fact, some say they don’t go far enough in forcing agents to disclose information about their payment for transactions. At least, that’s the position of the New York-based Risk and Insurance Management Society Inc. (RIMS), which is urging the state to offer more stringent regulations that would mandate a lot more disclosure.

“Consumer organizations have not had the opportunity to digest these additional changes and comment upon them,” says Scott Clark, director of RIMS External Affairs Committee and risk and benefits officer for Miami-Dade County Public Schools.

“The intent of the rule, as it was initially presented, was to bring greater clarity and certainty to the insurance purchase transaction in order to protect consumers,” he said. “While this objective was a positive first step by the (state,) each subsequent revision has diluted the original intent and has resulted in the final rule that falls short of complete and mandatory disclosure, for which RIMS has been a long-time advocate.” Plus, RIMS said, the new rules may still permit contingent commissions, a move that “could give rise to the same conflict-of-interest concerns that the proposed rule was meant to address.”

Many of the brokers — Aon, Willis and Marsh in particular — have been in favor of mandating compensation disclosure since the idea was first floated back in early 2009, when Aon CEO Gregory Case told the state that “we believe that all brokers and agents should, at a minimum, be willing to tell their clients who will pay them, how much they’ll make and the quotes insurers provide. This is the basic information every client deserves.”

It should be noted, critics of the proposal point out, that the brokers who support the regulation are already required to reveal that information as part of the conditions of settlements with the state over commissions and bid-rigging; so, it’s to their advantage if competitors would be required to do the same.

The state says it feels that the regulation strikes an appropriate balance between transparency advocates and those who wishing to avoid harm for small insurance operations. “This regulation will provide New Yorkers buying insurance with an important tool to use in making an informed decision,” said Superintendent James Wrynn. “Almost everyone buys insurance at some point, and in these difficult economic times, consumers should understand any incentives that may potentially affect the recommendations from their agents or brokers. This regulation protects the interests of consumers while allowing agents and brokers flexibility in how they present compensation information.”

Added Birny Birnbaum of the nonprofit consumer advocacy group, the Center for Economic Justice: “We hope consumers will take advantage of the compensation disclosures to discourage agents and brokers from steering consumers into unfavorable products — steering based on the agent and broker compensation arrangement and not the best interests of the consumers. Disclosures only work if consumers get the information and act on it.”

So what will it mean for agents elsewhere? It’s probably too soon to tell, but it’s already causing confusion and worry for agents in New York’s border states.

“We have a lot of producers that are writing cross-border coverage, or at least coverage with cross-border concerns associated with it,” said PIA’s Guilbault. “One of the questions that we have posed to the department and an issue that we’d like to discuss with them more is the implication for New Jersey or Connecticut insurance agents that are placing a policy which may have a small portion of the policy coverage with a New York connection to it. To what extent, are they required to provide disclosure? Does it only apply to that particular discrete segment of the policy?” Those answers are unclear. But given New York’s role in the economy at large and the insurance industry in particular, some wonder whether other states could look to the Empire State as a model to follow. That move would have a huge effect on agents elsewhere.

But not everyone is concerned.

In Texas, for instance, which recently passed legislation that requires insurance agents to disclose when they receive dual compensation, “I don’t think it will be an issue going forward,” said David VanDelinder, executive director of the Independent Insurance Agents of Texas. “We certainly don’t hear a cry from the public about this, and never have.”

But he can relate to the frustration his colleagues in New York feel, he said. “Sales people always object to anything that interferes with the sales process, and that’s basically our complaint about detailed disclosures of compensation,” he said. “They just add another controversial element that really doesn’t relate to the bottom line cost to the consumer. If failure to disclose affected the cost of something to the consumer then that would be another argument but no one’s ever shown that. The consumer can go elsewhere and get all kinds of quotes; there are plenty of agents out there and plenty of companies. And all those quotes include the same… they all present a bottom line cost to the consumer.”