The New York State Insurance Department this week released a new draft of a rule governing when and how insurance producers must disclose their compensation and competing quotes to customers.
The latest draft appears to be less burdensome on all insurance producers than a previous draft released in January but perhaps not enough to satisfy local independent agents and brokers.
The new draft calls for disclosure of details about compensation prior to binding but only if a customer asks for them. The disclosure can be in writing or, if time is an issue, orally. It calls for disclosure of details on original business only, not on renewals.
The regulatory action is a spillover from an investigation begun in 2004 by then-Attorney General Eliot Spitzer into acceptance of so-called “hidden fees” and their role in placement of business by large insurance brokers. Following Spitzer’s criticisms, large insurance brokers, including Marsh, Aon and Willis, paid fines and agreed to stop accepting incentive and contingent payments whose terms were kept from customers.
These large international brokers, however, have complained that they have been at a disadvantage in the marketplace because not all brokers have similarly sworn off such compensation.
At the same time, smaller and medium-sized independent agents and brokers have defended their own compensation practices, noting that they were never involved in any of the scandals or probes pursued by Spitzer against the big firms. They have resisted mandatory disclosure efforts.
State officials have been trying to engineer a compromise.
In January, the NYSID proposed its first draft of a regulation to clarify the rules around incentive compensation and bring all producers under the same rules regarding disclosure.
That original version required producers to disclose in writing before issuance of any policy or renewal certain details, including a description of the “nature and amount” of compensation, any material ownership interest the insurer has in the producer or the producer has in the insurer, along with a notice explaining that producer compensation may vary from company to company and alerting customers that they can ask for additional information. If asked, producers would be required to inform customers about any competing quotes received for their business and the compensation the producer would have received under those alternate contracts.
Also, if the customer asked, the producer would have to give an estimate of any compensation that might be paid but is not be known at the time of the sale, such a contingent commissions or pay tied to volume, profitability and retention.
The original draft defined compensation as “anything of value, including money, credits, loans, interest on premium, forgiveness of principal or interest, vacations, prizes, gifts or the payment of employee salaries, benefits or expenses, whether paid as commission or otherwise.”
The revised draft of the regulation, released this week, lessens the mandatory disclosure requirement on producers and shifts more responsibility to buyers to ask for the details on producer pay.
Under the revised rule, producers would not have to disclose the nature or amount of compensation or any material interests upfront. Instead they would have to give customers a general notification explaining whether they are acting as a broker for the customer or an agent for a carrier and whether they will be receiving compensation from the selling insurer. This general notice would be to inform buyers that they are entitled to a detailed description of the nature, amount and source of the compensation and any alternative quotes as well as future contingent compensation. If customers ask for this, then the producer would have to supply this information in writing prior to policy issuance. Oral disclosures would be permitted in cases where time does not allow for preparation of a written disclosure.
The revised form narrows the definition of compensation by omitting “payment of employee salaries, benefits or expenses.”
After the first draft of the rule was released earlier this year, corporate insurance buyers and the large Wall Street insurance brokers generally supported it.
At that time, Gregory Case, president and chief executive officer or Aon Corp., said, “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.”
But independent agent groups representing “Main Street” agents and brokers balked. They did not like that disclosure was mandatory and argued that having to collect and write up all of the detailed information would be a considerable burden on their operations. For the most part, they support making disclosure voluntary when requested by the customer.
All groups are still reviewing the latest draft but preliminary reaction suggests that once again not everybody is happy.
The Risk and Insurance Management Society (RIMS), representing insurance buyers, has expressed concerns about the latest draft, terming it a “significant retreat from the regulation’s premise of protecting the rights of insurance consumers.”
The risk managers said the new draft “imposes a new burden on consumers to make a request for compensation arrangements such as the amount of compensation and alternative quotes.”
Also, RIMS objects that the most recent revision exempts renewals from the disclosure requirements altogether because, the group said, “it is equally important for insurance consumers to know how the producer is compensated in a renewal as it is in the original policy transaction.
“We viewed the original proposed regulation as a step in the right direction towards strengthening the trust relationship between the consumer and producer. While the regulatory process is advancing, RIMS is disappointed that the new document does not contain consumer protections that were part of the original proposal,” said Deborah M. Luthi, a member of RIMS board of directors and director of enterprise risk management services at Matheson.
The easing of the rules in the latest draft may not be enough to win over Main Street agents.
The trade group Independent Insurance Agents & Brokers of New York, Inc. said its experts are reviewing the updated version. But IIABNY told its members that it does not appear to incorporate many of its recommendations.
“While the new draft is an improvement over the one the department released in January, we still have concerns about its scope and some of the specific disclosure requirements. We plan to meet with the department shortly to share our concerns. We will work with them on producing a fair regulation that does not unreasonably burden producers and that accomplishes the department’s goals,” stated Tim Dodge, director of Research and External Communications for IIABNY.
It remains to be seen whether NYSID will further accommodate independent agents. Eric Dinallo, who left the office of superintendent just this week, in a March interview with Insurance Journal was asked about the agents’ complaints about mandatory disclosure. He said:
“I think what their position is, which I have some sensitivity to, is that it was the large, commercial brokers that brought on all this regulatory attention. I mean, I think that’s the fair summary. And they’re sitting there saying, ‘Why are we being dragged into this, when it was the large, commercial, P&C brokers that kind of wreaked the havoc?’
And I guess I have sort of sympathy to that, but I don’t think that’s a good solution. I think that the ability to draw the line, I think, is very difficult once you delve into it. And I think that people should be proud of what they’re doing for their clients. They don’t necessarily have to be brokers to have the same kind of conflicts and the same kind of client-centric concerns that I think make it so that transparency is the right answer.”
With Dinallo gone, Kermitt Brooks, who was named acting superintendent, will have final say. The NYSID is accepting comments on the latest draft until July 29.