Following up on a promise for completion by year-end of a model regulation to address broker compensation disclosure, regulators turned their attention to what it means to “act on behalf of the customer.”
The language was a key part of a discussion on Dec. 6 among state insurance commissioners, industry and consumer advocates during the winter meeting of the National Association of Insurance Commissioners here.
The work of forging a model continued after a NAIC public hearing on Dec. 4 during which William Newton of the Florida Consumer Action Network, who was one of over 30 speakers, said that the crux of the issue is “all about trust.”
NAIC President Diane Koken outlined a tight time frame for adoption of a compensation disclosure amendment to the Producer Licensing Model Act: comments on the new draft and Dec. 6 testimony received by NAIC on Dec. 9; a new draft issued by the NAIC shortly after; another comment period in the week following the issuance of the new draft; and, adoption by the end of the year so that it can be included in next years legislative calendar.
Adoption of these amendments does not preclude additional action, regulators said.
The draft language focuses on what it means to “act on behalf of the customer.” (For full text, visit www.NAIC.org.)
Regulators, in general, agreed that for the near term, they would focus their efforts on disclosure language in Section A of the draft rather than on what the producer must disclose as outlined in Section B of the draft.
Section A states that “where any insurance producer or any affiliate of such a producer receives any compensation from the customer or acts on behalf of the customer,” compensation including commissions cannot be received unless the producer, prior to the purchase of insurance, has: obtained the customers documented acknowledgement that such compensation will be received by a producer or affiliate; and disclosed the amount of compensation. If, according to the NAIC draft, the amount of compensation is not known, then a reasonable estimate and a method for calculating such compensation must be disclosed.
The NAIC also is working with the National Conference of Insurance Legislators, Albany, N.Y., on the development of a model.
Craig Eiland, a Texas legislator who is the newly elected NCOIL president, told regulators during testimony that any model should have transparency and a definition of the fiduciary responsibilities of a broker.
Regulators offered their assessment on the latest draft.
Disclosure language should address both brokers and independent agents, according to Audrey Samers, general counsel with the New York insurance department.
During the hearing, Holly Bakke, New Jersey insurance commissioner, replying to a panelists comment about the time it would take to pull together an initial disclosure, said, “Someone is getting paid for service. Please dont say it is too difficult to provide. You may need to rethink the system.” When the department reviewed information it had on compensation, she continued, “compensation structures were all over the place.” Going forward, she said, there will have to be more transparency of compensation arrangements.
Walter Bell, Alabama insurance commissioner, noted the different kinds of producers and compensation structures and raised the issue of whether there would be different kinds of disclosure. And, Maryland Insurance Commissioner Alfred Redmer noted that “it seems we are trying to legislate the intent of producers and that is a very difficult thing to do.”
“The broad public perception is that there are corrupt compensation arrangements. It is important to address the publics concerns but not sweep things that are not corrupt into the pile to be targeted,” said Montana Insurance Commissioner John Morrison. It is about the kinds of promises being made to the consumer, he continued, and therefore, language should reflect that any compensation from the customer in consideration for an agreement to act for the customer and in the best interests of the customer.
Gary Cohen, general counsel with the California department, said it will become clear the problem is not limited to companies that have come to light so far. At the end of the day, he continued, there will be reform. “We can lead or we can follow. I suggest that we lead.
“Disclosure is not enough to deal with the problems already taking place,” Cohen said.
“A broker is supposed to represent the client and if it isnt doing that, why is it entitled to charge a fee for a service?” he asked. When a broker only presents offers of carriers with which it has a contingent fee arrangement, “it is committing fraud, pure and simple.”
Consumer advocates and industry representatives also provided comments.
Birny Birnbaum, executive director of the Center for Economic Justice, Austin, Texas, said regulators should focus their efforts on developing specific disclosure requirements rather than carving out exceptions to those requirements. Consumers, he noted, will pay the bill either directly or through increased premiums from the insurer.
Also, he said that by carving out exceptions, “you are encouraging game playing. You are not going to address the problem.”
William Anderson, representing the National Association of Insurance and Financial Advisors, said “the life insurance sale is extremely difficult to do” and if a producer is required to disclose to a consumer that he is also a representative of the company, it would “kill the sale.”
“The agent has to decide who his master is. You cant have two masters,” responded John Oxendine, Georgia insurance commissioner. Life agents, he continued, would be “morally wrong to have it both ways unless they disclose [the arrangement.]“
During the hearing, representatives from organizations including the American Insurance Association, the American Council of Life Insurers, the Independent Insurance Agents and Brokers of America, NAIFA, the National Association of Independent Life Brokerage Agencies, the National Association of Professional Insurance Agents, the Association for Advanced Life Underwriting, Property Casualty Insurers Association of America, and the National Association of Mutual Insurance Companies provided testimony on the issue.
The main message these groups sent to regulators was to keep their response targeted to areas where they discover a problem.
Among the collective points that they also made were: keep it focused on transactions related to the placement of insurance and not financial planning or estate planning services; make it applicable to transactions where there is more than nominal compensation; do not make it applicable to agents who are tied to one company; and, note the differences between industry segments and types of producer distribution systems. Additionally, the confidentiality of information provided to regulators was raised.
Ron Panneton, a representative with NAIFA, spoke on behalf of NAIFA, NAILBA and AALU at one of the hearings.
He said that a model law or other regulation should apply only when there is more than nominal compensation; when the compensation represents placement of insurance and not financial planning or estate planning services; and should limit disclosure to the fact that there is compensation from a company but not the amount.
The amount of a producers commission does not affect the value of the product being offered, Panneton said. Additionally, he continued, “it focuses attention on how much the producer is receiving rather than on important matters such as how much insurance is needed and what kind of insurance is needed.”
Issues that are important, he told commissioners and those at the hearing, include whether there is enough coverage for a family or for a business.
Russ Childers, representing the National Association of Health Underwriters, Washington, said his organization condemns alleged bid-rigging and encourages ethical practices among members. Disclosure of commissions is appropriate as are agent commissions, he says. Childers explained that agents provide a service and act in a clients best interest because good service will encourage referrals.
Reproduced from National Underwriter Edition, December 10, 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.