The new year is likely to bring new compensation disclosure rules for New York insurance producers.
A pending regulation allows agents and brokers to accept incentive pay from insurers that is tied to volume and production, but requires them to give customers who request it information on this income for any policy recommended or quoted.
The Producer Compensation Transparency Regulation was submitted to the Governor’s Office of Regulatory Reform in September and on Dec. 2 it was posted in the state register of proposed rules, which starts the clock ticking on a 45-day period during which final comments are accepted. After that period, the rule along with any final revisions may be put into effect.
The regulation does not regulate the amount or nature of compensation but seeks to address potential conflicts of interest where incentive compensation is paid.
“There is nothing inherently improper about an incentive-based compensation arrangement between an insurer and the producer, but due to the differences in each insurer’s compensation arrangement, a potential conflict of interest may arise when an insurance policy that would earn the producer the greatest compensation for its sale is not the most for the customer in terms of coverage, service or price. This may create an incentive for the producer to recommend that policy to the customer,” the official explanation of the new regulatory policy states.
The specific regulation has been the subject of public and industry discussion since July 2008. However, calls for compensation oversight date back to investigations begun in 2004 by then-Attorney General Elliot Spitzer and the New York State Insurance Department that uncovered instances of criminal bid rigging by a large broker and several large insurers, as well as steering schemes involving a number of major insurers and other insurance producers. The investigation culminated in settlements between 2005 and 2006 under which the large producers and insurers paid more than $1 billion.
Despite the fact that so-called Main Street, smaller and mid-sized agencies did nothing wrong, they were caught up in the backlash from the investigations.
State officials and some consumer advocates argued that the issue goes beyond the large brokers and companies and that the market would function better with some rules that give buyers some information on incentive compensation.
Opponents of the regulation urged regulators to let competition in the marketplace deal with any conflicts that might arise. Producers who do not offer the best coverage, service and price will lose business to those that do, they said.
However, consumer representatives argued that buyers rely on their producers to comparison shop the market for them.
New York officials had considered banning certain types of incentive compensation for producers as well as requiring more extensive disclosure by agents and brokers but eventually rejected those proposals as too burdensome.
Specifically, the regulation requires an insurance producer (agent or broker) to disclose whom he or she represents in the transaction, that the producer will receive compensation from the insurer based upon the sale of the policy, that the compensation paid by insurers may vary, and that the purchaser may obtain from the producer, upon request, information about the compensation the producer expects to receive from the sale of the policy.
Furthermore, the regulation also requires that if the customer requests it, the producer must disclose the amount of compensation for the policy selected and any alternative quotes presented.
If the producer makes the disclosure orally, the producer may either prepare a certification stating that the producer made the oral disclosure, or the producer may make a recording of the disclosure. The regulation requires a written disclosure where the customer specifically asks for more information. The producer must retain a copy of all written disclosures and certifications or recordings of oral disclosures for a period of three years.
A producer who chooses to satisfy the initial disclosure requirement in writing may prepare a “boilerplate” form to use. A producer who chooses to provide oral disclosure and prepare a certification to that effect may also use a “boilerplate” form. The producer is only required to provide information known at that time, or to make a reasonable estimate.
“Overall, all consumers in the state, whether personal or commercial, are likely to benefit from the regulation because transparency and a better understanding of the role of the insurance producer is likely to lead to better-informed selection among available options,” the rule states.
Producer groups have been involved in the process, raising concerns along the way. Their concerns include the description of a producer’s role in the insurance sales process, the level of detail in the disclosure of alternative quotes and the rule’s application to different types of insurance salespeople.
They have also voiced concerns over the costs of compliance and record-keeping, as well as possible penalties for those who inadvertently fail to comply with the rules.
After New York began its investigations, the National Association of Insurance Commissioners in 2004 amended its Producer Licensing Model Act, which many states follow, to include requirements that brokers — but not agents– disclose compensation to purchasers.
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