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What to do when a prospect asks for a rebate

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Imagine this scenario. Joe the Producer is discussing a life insurance policy with a small business owner, and things are looking good. Joe’s fact-finder has identified the client’s need, and he has found the best coverage for the business owner’s particular situation.

Then the prospect throws Joe a curveball: He’ll buy the policy, but only if Joe kicks back a portion of his commission on the sale. This, of course, is also known as rebating, which is illegal in every state except California and under certain conditions in Florida.

Joe’s not in California or Florida and knows very well what the prospect is asking him to do is illegal and could cost him his license. How does Joe proceed from here in an ethical manner?

After being momentarily taken aback by this request, Joe tells the prospect, “That’s illegal. I could lose my license.” After all, perhaps the prospect didn’t know it was illegal and was simply trying to bargain for a better deal on this policy. Surely many consumers are in the dark about the rules in insurance transactions.

But the prospect says “another agent” within his ethnic community has told him he would do it for him because that’s “just how the game is played.”

Now you know a little bit more about the kind of prospect you are dealing with. It’s one thing to ask for a kickback out of ignorance or just to see if you can get a better deal, but quite another once they know it is illegal and they still want it.

Insurance ethics expert Dick Weber, MBA, CLU, AEP, President of The Ethical Edge Inc., and a past president of the Society of Financial Services Professionals, says the answer is simple in every state except Florida and California: “I’m sorry, I am legally prohibited from doing that and if I were to do that I would make myself vulnerable to having my license revoked by the state department of insurance, which would eradicate my ability to make a living.”

In Florida, which was the first state to legalize rebating in 1984, Weber says an agent can only rebate within a “broad class” of client—the first time you offer a rebate for a client, you must do the same for all clients within that broad class.

California’s Proposition 103 repealed that state’s anti-rebating law in 1988 with no such restrictions as Florida. But Weber notes all the major insurance companies immediately prohibited their agents from offering rebates, telling them they would cancel their contracts with any agent found to be rebating commissions.

So while it may technically be legal for agents to rebate commissions in those states, if the insurance carrier finds out about it, the agent can pretty much count on losing his contract with that carrier.

“You are expected to behave the way the carrier intends you to behave,” Weber said. “You probably would not be discovered, but it is contrary to your agreement with the insurance company.”

Help the prospect understand how it really works
Weber said that in asking for a rebate, perhaps the prospect has a concern about how much the producer makes on the sale of the policy. This provides an opportunity to educate the prospect about the value an agent brings to the table and how an agent is actually paid.

Bob Vineyard, a longtime agent who is the founder and owner of Atlanta-based Georgia Medicare Plans, said he would explain it this way:

“When someone, let’s say an insurance agent, successfully places an application with a carrier, they are paid a commission or service fee in exchange for their work. The compensation is usually expressed as a percentage of the premium with higher percentages being paid for more products with a high degree of complexity.

“The agent is self-employed. They are responsible for finding their own prospective clients. Agents have business expenses (computer, utilities, Internet, office supplies, etc.) just like any other business. No one pays these expenses for them. The agent ‘fronts’ the money for these necessities and then is compensated after the sale. Depending on the product, many times the agent works for weeks or months before the application is taken and then may wait another two months (or longer) until they are paid,” he said.

Vineyard said it is not unusual for an independent agent to directly invest hundreds of their own dollars up front while working to sell a policy. He says agents spend a lot of time educating consumers about their options and answering their questions, all with no guarantee the sale will ever happen and they will ever see a dime.

“If someone wants or expects a cut of my commission, then they have no real appreciation for what I do, or how many ‘thank you’ jobs I do to finally get paid,” said Vineyard. “And neither do they value the level of advice and expertise I bring to the table.”

The advice he provides comes from nearly 40 years in the industry and is something you can’t get from a self-service, online agency.

“If someone expects a rebate, then they need to buy from an automated website with minimal agent involvement. Use the drive-through to place your order,” Vineyard said. “I can and do save clients a lot more money than they will ever get back with a rebate.”

NEA advice on rebating
On the subject of rebating, the National Ethics Association told us agents should refuse to refund a share of premium on the simple basis that it is illegal in most jurisdictions. If the agent has trouble reconciling the demands of the law with the need to make money, the NEA offers the following considerations:

  • There will always be competitors willing to do or say anything to get a sale. Do agents want to be known as ethical advisors or as those who simply chase the money?
  • Clients who pressure agents to break anti-rebating laws may do so regarding other matters. Do agents really want to do business with people who will put them at further risk in the future?
  • Not all clients are savvy or greedy enough to demand a rebate. If agents succumb to their pressure, they will be hurting the majority of consumers who would never ask for one. Why should only one class of customers catch a break?
  • If rebating becomes a more frequent practice (even if illegal), more agents and clients will seek to replace existing contracts with newer, cheaper ones. This may well prove ruinous to carriers who must now bear more acquisition costs than anticipated.
  • Finally, rebating can lead to the loss of smaller agencies and producers who can’t afford to trade a piece of their compensation for a sale. This would make it even harder for consumers to work with qualified agents to address their key financial needs. This is not good for the insurance industry or for society at large.

“For all of the above reasons, we believe it’s advisable to stand your ground when asked to rebate a premium,” said Steven R. McCarty, chairman of the NEA. Giving in is not only illegal, it’s unethical because it hurts so many parties to the transaction, as well as the insurance marketplace and society as a whole.”

Extra Point: Should you turn in the other agent?
The NEA also said it would advise against reporting the other agent, if you knew who it was, to the authorities.

“Reason: it’s hard to know whether the prospect’s statements are true or simply ploys to gain advantage in the sale process,” McCarty said “For example, since the other agent shares the prospect’s ethnicity, it’s not unreasonable to assume the prospect will likely keep the sale “in the family.” But the person might be requesting a rebate from an outside agent as leverage to get the preferred agent to lower his price. If the non-ethnic agent reports the other agent, then he’ll soon find himself in a “he said/she said” dispute with the insurance department. However, if the agent has written proof of rebating, say, in an e-mail or letter from the competing agent, then by all means he should report the violation to the insurance commissioner.”