AAMGA Offers Feedback on Proposed Broker Disclosure Amendment to Producer Licensing Model Act

December 3, 2004

The National Association of Insurance Commissioners (NAIC) recently issued a draft Proposed Broker Discloser Amendment to the Producer Licensing Model Act, and requested industry and public comment before commencing hearings on the issue.

In turn, The American Association of Managing General Agents (AAMGA) issued a response to the NAIC, in order to make certain the position of the wholesale marketplace is clearly articulated – and that the lines of demarcation are made clear in regard to the relationships between managing general agents/general agents and their company markets and retail producer customers; in comparison to the relationships between agents/brokers and their policyholder customers.

The AAMGA’s position also reportedly includes a more accurate portrayal of the manner in which profit commissions operate in the wholesale marketplace, in comparison to the overly broad manner in which they have been depicted in the recent past. The full text of the AAMGA’s position is as follows:

“The American Association of Managing General Agents (AAMGA) is deeply troubled by the allegations and admissions arising out of the various state attorneys general investigations pertaining to the practice of illegal kick-backs, bid-rigging and fraud in the insurance market. The AAMGA and its members denounce these illegal and unethical actions as they violate the law, betray the public trust and cast an unacceptable shadow over the free-market and entrepreneurial strength of the today’s competitive insurance market.

“In respect of the NAIC’s request for public and industry comment on the Proposed Broker Disclosure Amendment to the Producer Licensing Model Act, the AAMGA wishes to advise that it endorses full broker disclosure of compensation should the transaction between a producer and insured buyer involve the producing broker being compensated by the buyer under the terms of an insured buyer service agreement. We wish to note that AAMGA members serve as wholesale intermediaries between the retail producer and the insurance company and, as such, they have neither direct nor indirect
contact with the insured buyer.

“In most cases, these transactions occur subsequent to the insurance company’s entrusting underwriting and binding authority to the wholesale intermediary. In other words, the wholesale intermediary represents the insurance company as the de facto branch office, and is paid a commission to cover these underwriting and production costs. In most cases, the wholesaler shares these commissions with the retail producer.

“Many insurance carriers also offer profit sharing commission to their
wholesale intermediaries/general agents based on annualized premiums, the achievement of targeted combined ratios and profits that the wholesaler has generated and for which they are responsible. This is analogous to profit sharing that an insurer distributes to employed underwriters. The profit sharing commissions are not a guarantee, as they are lost or reduced when the targets have not been met or when the underwriting year has been unprofitable. There is nothing illegal or unethical about this form of fair compensation and equitable risk sharing.

“Therefore, and in light of the foregoing, the AAMGA – while supporting full broker disclosure in a transaction between an insured buyer and its producing broker, where the buyer pays the broker directly for services rendered – respectfully suggests an amendment to the Proposed Broker Disclosure Amendment to the Producer Licensing Model Act. Either an item number 4 should be added exempting managing general agents, general agents, and/or wholesale intermediaries from the Section on compensation, or an
additional Drafting Note should be added as follows:

Suggested drafting note

“The provisions of this section shall not apply to an individual or business entity licensed as an insurance producer who acts only as an intermediary between the insured’s or prospective insured’s producer and an insurer (i.e. managing general agent, general agent, or wholesale broker).

“We thank the NAIC and this Committee for the opportunity to submit these comments, and look forward to answering any questions at the upcoming Task Force on Broker Activities hearing in New Orleans. We look forward to the opportunity of working with the Task Force and the NAIC in delineating the specific activities of managing general agents, general agents and wholesale brokers in the marketplace, and in continuing to facilitate the appropriate, ethical and necessary insurance transactions and professional business practices.”

The AAMGA’s actions were taken following the activities emanating out of the continuing investigations by various state attorneys general and regulators, and hearings being held on Capitol Hill, on incidents of illegal bid-rigging, kickbacks and fraud which have recently been disclosed.

The American Association of Managing General Agents is an international trade association representing more than 250 managing general agencies and general agencies, employing more than 8,000 insurance professionals in all 50 states. The membership also includes more than 230 associate members consisting of insurance companies, brokers and other professional entities.

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