State Regulators Reveal Model Disclosure Act

November 16, 2004

An insurance broker would be required to obtain written approval from a customer before receiving any compensation from an insurer for a piece of business under a model compensation disclosure act unveiled by the nation’s insurance regulators.

A broker would also have to tell a client how much any insurer payment is or give a reasnable estimate.

The newly formed Executive Task Force on Broker Activities of the National Association of Insurance Commisisoners (NAIC) released late yesterday draft model legislation that would implement new disclosure requirements designed to ensure consumers are provided the information necessary to understand the manner in which brokers are compensated for the sale of insurance products.

As proposed, the draft model legislation would amend the NAIC’s current Producer Licensing Model Act. The draft is part of ongoing efforts by state insurance regulators to address issues surrounding the use of compensation arrangements by insurance brokers. The model would have to be passed by state legislatures.

The NAIC will hold a public hearing on December 4 at its Winter National Meeting in New Orleans to receive public comment on the proposed language. State insurance regulators are planning to adopt model disclosure language by the end of the year.

“One of the three components of our action plan is to achieve greater transparency through development of model legislation that will require brokers to disclose all compensation arrangements,” said NAIC President/Pennsylvania Insurance Commissioner Diane Koken, who also chairs the task force. “With this draft language, we are addressing disclosure of compensation in a two-part framework: disclosures triggered when a broker receives compensation from the insured and insurer, and disclosures required by all insurance producers.”

Among the requirements contained in the draft model legislation, brokers would be required to first obtain the insured’s written consent before receiving compensation from the insurer for the same transaction.

In addition, brokers would be required to disclose the amount of compensation from the insurer and the method for calculating the compensation, including any contingent compensation. In those cases where the contingent commission is not known, brokers would be required to provide a reasonable estimate of the amount and method for calculating such compensation.

The draft model language would also require all insurance producers to disclose to customers: (1) that the producer will receive compensation from the insurer, (2) that the compensation received by the producer may differ depending upon the product and insurer and (3) that the producer may receive additional compensation from the insurer based upon other factors, such as premium volume placed with a particular insurer and loss or claims experience.

State insurance regulators said they continue to pursue efforts to identify improper conduct in the marketplace.

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