NAIC Approves Disclosure Rules

State regulators adopted new producer compensation disclosure requirements as the year closed last week, but at least one major agent/broker group contends the proposal needs more work before being voted into law by state legislatures around the country.

The National Association of Insurance Commissioners, responding to allegations of broker bid-rigging and contingency fee abuse leveled by New York Attorney General Eliot Spitzer and others, voted 31-15 during a Dec. 29 conference call to adopt the majority of the proposed compensation disclosure amendments to the groups model producer licensing act.

One section that was not adopted will be sent back to the NAIC Executive Task Force on Broker Activities for further development and will be reexamined within 90 days.

However, the Independent Insurance Agents & Brokers of America said that while it appreciates the regulators effort, several issues still need to be resolved. Among them:

Improving the distinction between brokers and insurance agents.

Ensuring that consent and disclosure rules are “sensible and reasonable” and can be achieved.

Clarifying that the requirement doesnt apply to renewal and residual market business.

IIABA also cited concerns with the deferred section, which the group says was “overkill” because it would apply to “every agent and broker in the country.”

The NAIC said it will continue its work on producer fee disclosure issues in the new year, and even refine and change already adopted measures, if necessary. “These are not engraved in stone. They can be changed later if we identify errors,” said NAIC President Diane Koken.

Indeed, Ms. Koken, Pennsylvanias insurance commissioner, tried to address IIABAs concerns, giving NU a point-by-point response to the issues the group raised.

On improving distinctions among different types of producers, she said: “Its very difficult to come up with a bright-line distinction between brokers and agents.It depended upon how they were functioning. My question would be, Why is more disclosure bad?”

On ensuring that consent and disclosure requirements are “sensible and reasonable” and can be achieved: “I would like to think that we would never propose anything we dont think is sensible and reasonable. We think it is a balanced approach. We will continue to look at this issue and continue to work on development of additional model laws.”

On whether the requirement applies to renewal and residual-market business: “As far as I am concerned, the language does apply to renewal of a policy. There are other questions about whether you have a policy and you add a car, does it apply to that? My position would be it does not.”

The main part of the amendment adopted by the NAIC is Section A, which demands that a producer getting any compensation from a client for placing insurance or representing the customer with respect to that placement shouldnt accept any fee from an insureror other third partyfor that placement unless the producer has, prior to the customer buying the insurance:

Obtained the customers documented acknowledgment that such compensation will be received by the producer or affiliate.

Disclosed the amount of compensation from the carrier or other third party. If the amount of compensation is not known at the time of disclosure, the producer should disclose the specific method for calculating such compensation and, if possible, offer a reasonable estimate.

The section clarifies, however, that this disclosure demand will not apply to a producer who meets all of the following requirements:

The producer does not receive compensation from the customer for the insurance placement.

In connection with the insurance placement, the producer represents an insurer that has appointed the producer.

The customer is told before the insurance purchase that the producer will get compensation from a carrier for that placement; or that, in connection with the placement, the producer represents the carrier and may provide services to the customer for the carrier.

The approved sections also stipulate that certain intermediariessuch as a managing general agent, a sales manager or a reinsurance intermediaryare excluded from the disclosure requirement.

One section that was not approved and now goes back to the NAIC Executive Task Force on Broker Activities is Section B of the draft, dealing with specific disclosure issues regarding a broader class of producers. The regulators said they will also look at, among other issues, fiduciary liability, disclosure of all quotes received by a broker, and disclosures relating to agent-owned reinsurance arrangements for possible inclusions in the section.

Reproduced from National Underwriter Edition, December 30, 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.