Imagine a regulation that, implemented for the purpose of protecting consumers, actually has the opposite effect.
That’s the likely result of the New York State Insurance Regulation 194, which takes effect on January 1, 2011. An outgrowth of a 2004 investigation into certain mega-brokers by then-New York Attorney General Elliot Spitzer, the rule ratchets up compensation disclosure requirements for agents and independent brokers licensed to do business in the Empire State.
If Reg. 194 withstands a current court challenge, producers can expect to devote a lot more time and resources on client cases to remain in compliance. Indeed, as some fear, the rule may be so burdensome as to prompt significant numbers of small and mid-size agencies to leave the business. Upshot: Fewer producers selling life insurance, particularly to the already underserved middle market; and a rise in the number of uninsured consumers.
The Specifics on 194
Can a regulation designed to enhance compensation transparency really be so bad? Given the onerous two-step process, I don’t see how one can conclude otherwise.
In step 1, producers selling a policy have to disclose (verbally at or before the time of application; and in writing when the contract is issued): (1) a description of their role in the sale; and (2) whether they will receive compensation from the selling insurer or other party based on the sale.
Then they have to indicate whether the compensation might vary with the type of contract, the insurer, the volume of business they give the insurer and the profitability of their own practice. Plus, buyers have to be told they can ask for more information about compensation on the recommended policy and on any alternative quotes given.
If the buyer requests more information about compensation–Heaven forbid–then step 2 kicks in.
Producers now have to outline the “nature, amount and source” of compensation to be received (including comp for a parent firm, subsidiary or affiliate) and they must detail the payout for alternative quotes given. In addition, they have to outline their “material ownership interest” in the insurer issuing the policy, and the insurer’s material ownership interest in them. And–yes, there’s more–they have to give a statement indicating whether they’re legally prohibited by the insurer from altering the level of compensation.
And what if the producer doesn’t know the amount of commission to be paid? Then they must include in the disclosure a “reasonable estimate” as to the compensation, plus a description of all the factors that might affect the payout.
Producers who earn a fee for advisory services, in addition to a commission on policy sales, also will be bound by the new regulation. They thus will have two sets of disclosure requirements to meet: one on the contract sale; the second as stipulated in the private contracts they enter into with clients in respect to the advise/planning component.
In all, Reg. 194 is a heavy burden, one that could add much to producers’ time commitment on individual cases. Also to consider are technology upgrades, additional paperwork, beefed-up staff and/or changes to the sales process they may need to satisfy the requirements.
In mandating transparency in the disclosure of compensation, the new rule might also have an unintended effect. Richard Poppa, CEO of the Independent Insurance Agents and Brokers of New York (which, together with the Council of Insurance Brokers of Greater New York, is one of two producer groups opposing the New York Insurance Dept. in the lawsuit) asserts the regulation will likely divert the consumers’ attention from issues that should be their primary focus: identifying their risk exposure; and purchasing the best product (irrespective of compensation) to address that exposure.
Poppa adds that IIABNY on May 13 sent the New York Insurance Department a proposal for language that a producer could use for making the required initial disclosure. A wise move: The new rule, he notes, is likely to take effect before a judge rules on the suit–a New York State Article 78 proceeding that calls on the court to “annul part or all of the regulation.”
Coming to a State Near You
One can only hope that IIABNY and CIBNY are well represented in the case. Because Reg. 194 is bad news. And for all of you producers who think you’re out of harm’s way because you don’t work in New York, think again. Many state insurance departments look to New York for guidance when establishing their own producer regulations. And so a rule looking just like this one could be coming your way–soon.