Regulators are pondering what it means when an insurance agent or broker “acts on behalf of the customer.”[@@]

The subject came up here today at the winter meeting of the National Association of Insurance Commissioners, Kansas City, Mo., as insurance commissioners, industry representatives and consumer advocates discussed the draft of a proposed amendment to the Producer Licensing Model Act.

The NAIC began developing the draft earlier this year, when reports surfaced of problems with broker compensation structures and broker comp disclosure practices.

NAIC President Diane Koken, the Pennsylvania insurance commissioner, said she wants the NAIC to receive comments about the draft amendment by Thursday; issue a new draft soon after; open a second, brief comment period; then adopt the model amendment by the end of the year, so that states can include it in their 2005 legislative calendars.

Regulators agreed that, in the near term, they would focus most of their efforts on Section A of the draft, which deals with disclosure language, rather than on Section B, which deals with what the producer must disclose.

Section A would apply to any situation in which “any insurance producer or any affiliate of such a producer receives any compensation from the customer or acts on behalf of the customer.”

Before the customer bought insurance, Section A would require the producer or affiliate to document the fact that the customer knew of the existence of any compensation and knew of the amount of the compensation. Otherwise, the producer could not receive any commissions or other compensation in connection with the insurance purchase.

If the producer or affiliate did not know just how much compensation was coming, the producer or affiliate would have to give a reasonable estimate, along with a method the customer could use to estimate compensation payments.

Some reactions to the draft:

- Audrey Samers, general counsel at the New York State Insurance Department: Samers recommended that the disclosure language address both brokers and independent agents.

- Montana Insurance Commissioner John Morrison: Morrison said efforts to correct corruption must come before efforts to improve disclosure.

“The broad public perception is that there are corrupt compensation arrangements,” Morrison said. “It is important to address the public’s concerns but not sweep things that are not corrupt into the pile to be targeted.”

Because the controversy is about the kinds of promises being made to the consumer, the model language should reflect the idea that any compensation from the customer is consideration for an agreement to act for the customer and in the best interests of the customer, Morrison said.

- Georgia Insurance Commissioner John Oxendine: “The agent has to decide who his master is,” Oxendine said. “You can’t have 2 masters.”

Trying to “have it both ways” without disclosing the compensation arrangements to the customer would be “morally wrong,” Oxendine said.

- William Anderson, a representative for the National Association of Insurance and Financial Advisors, Falls Church, Va.: “The life insurance is extremely difficult to do,” Anderson said.

If a producer is required to disclose to a consumer that he represents the company as well as the consumer, that would “kill the sale,” Anderson said.