Serio Unveils NAIC Proposal On Broker Comp Disclosure

Washington

Representing the National Association of Insurance Commissioners, New York Insurance Superintendent Greg Serio outlined for a Senate committee last week a “three-pronged” program that state regulators will implement to strengthen oversight of agents and brokers.

Serio was representing the NAIC as chairman of its Governmental Affairs Task Force. He said the three-pronged program to protect consumers will include an amendment to a model law on broker disclosure of compensation. The program also will coordinate multi-state information requests and analyses of certain business practices by brokers and insurers, and launch an online system that will allow anonymous filing of “tips” to alert state regulators about unlawful or unscrupulous business practices.

Under the proposed amendment to the Producer Licensing Model Act drafted by the NAIC, “any insurance producer,” whether broker or agent, would not be allowed to receive any payments from a carrier unless it is disclosed in advance to the insured and the insured has agreedin writingto the payment.

The language recently was drafted by a 12-member NAIC Executive Task Force on Brokerage Commissions headed by NAIC President and Pennsylvania Commissioner Diane Koken.

It is expected to generate an intense reaction from the agent/brokerage community, both because of the large amount of bookkeeping compliance it will require and because it may have a disproportionate impact on small agents and brokers. Appearing to anticipate that response, the NAIC added language to the proposed amendment that would exempt payment of “nominal fees” from such disclosure and paperwork, the language says. How “nominal” would be defined, however, is seen as critical to winning support from small producers.

The proposed amendment will be the subject of a public hearing at the next NAIC quarterly meeting in New Orleans on Dec. 4. The NAIC, in order to show it is on top of the issue in the wake of investigations of wrongdoing by brokers, wants the amendment to the model law to be adopted quickly so it can push for enactment in all 50 states as soon as possible, according to a number of industry sources. Written comments on the proposal are due by Dec. 1.

Reacting to the NAICs proposal, David F. Woods, CEO of the National Association of Insurance and Financial Advisors, said, “We want to help consumers make informed buying decisions.”

He added that, “We always have supported disclosure of the relationship between the agent and the company and the total cost of putting a policy on the books during the buying process. Knowing the total cost of the insurance is most helpful to consumers.”

Woods said NAIFA, “working in close concert with the Association for Advanced Life Underwriting and the American Council of Life Insurers, stands ready to assist the NAIC to improve and implement its action plan, help root out the actors involved in any misconduct and restore consumers confidence in our industry.”

The amendment says any insurance producer “or any business entity related to such producer” would be covered by the model law. Under the proposal, any producer entitled to receive commissions from an insured would not be allowed to do so unless the producer has received from the insured its “written consent that such compensation will be received by the producer or business entity related to the producer.” Moreover, the amendment says, the producer must disclose to the insured the amount of compensation the producer is receiving from the insurer, as well as the method for calculating such compensation, including any contingent compensation.

“If the amount of contingent compensation is not known at the time of disclosure, the producer shall disclose a reasonable estimate of the amount and method for calculating such compensation.”

The proposed amendment also would require an insurance producer to disclose the following information, to an insured or prospective insured, prior to the purchase of insurance:

–That the producer will receive compensation from the insurer for the sale;

–That the compensation received by the producer may differ depending upon the product and insurer; and,

–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.

At the hearing, Serio also defended state insurance regulation. “Insurance is a complex commercial product that is very much different from banking and securities. Consequently, the process for regulating insurance products must also be different,” and then brought up the pocketbook issue. “Ultimately,” Serio said, “a federal regulator would adversely affect state premium taxes and other revenues, which totaled $12.3 billion in 2002.”


Reproduced from National Underwriter Edition, November 18, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.