N.Y. Agents Balk At Proposed Rules For Producer Compensation Disclosure

New York's newly proposed producer compensation disclosure regulations are unacceptable, and without changes legal action is a possibility, a leading agent association executive warned last week.

“In its current form, without additional changes, we cannot support [the regulations],” according to Richard A. Poppa, president and chief executive officer of the Independent Insurance Agents and Brokers of New York, following a conference call with association executives and officers.

He said his association has every intention of continuing discussions with the governor's office and insurance department officials to clarify portions of the regulation, but he would not take off the table the possibility of a legal challenge if changes are not made.

However, “it's a little premature to talk about legal or other action,” Mr. Poppa added. “We expect to continue working with the governor's panel and [the insurance] department.”

At issue is the department's release of draft regulations that would require agents and brokers to inform clients they have a right to receive details about their insurance intermediary's compensation from carriers.

If the customer wants such information, the regulation outlines how and what needs to be disclosed, as well as what records need to be kept.

The proposed regulation (available at www.ins.state.ny.us) is now before the Governor's Office of Regulatory Reform for review. After that, it will be subject to a 45-day comment period, and is still subject to modification or withdrawal after the comment period.

Mr. Poppa said there are several sections of the four-page regulation that the association could not live with.

One is the role of the producer as an agent or broker in the proposed disclosure. Some have argued that it could lead to confusion on the part of clients over the technical relationship of a broker when both agents and brokers aim to work in the best interest of their client.

In addition, Mr. Poppa said there are circumstances where the producer or customer service representative dealing with a client would have no idea what the agency's compensation arrangement is, making the insurance transaction unnecessarily cumbersome for all parties.

“This is one item we cannot accept in any form,” he said.

Other portions of the regulations are murky in their application and open to interpretation, he added. He mentioned the sort of information that has to be given on renewals, and the amount of detail beyond what the customer requests or is helpful in understanding the transaction.

He said there is also concern that the regulation will cost producers more than its value to consumers. Others have noted that there are unknown expenses involved from the storage of records, which must be kept for three years.

“We still don't believe that this regulatory action is necessary, but if there is going to be a regulation, then it needs to be clear and unambiguous so producers do not have to anguish over what is required and what is not,” according to Mr. Poppa.

He added he is optimistic such issues can be worked out, noting that a positive relationship remains between all parties involved, while predicting that they will “come to a good conclusion for consumers and members.”

The New York Insurance Department's proposed Producer Compensation Transparency Regulation comes in the wake of revelations in 2005 by the New York Attorney General's Office, which found misconduct among major brokers selling commercial insurance, who were rigging bids and receiving contingent payments for steering business to certain insurers.

Before the group's conference call, Michael Barrett, legislative representative for the IIABNY, said that a recent meeting with state officials was “productive,” but cited two aspects of the regulation he believes must be clarified.

Under the new rules, Mr. Barrett said producers would have to explain to customers whether they are an agent or a broker, and how that affects their compensation. While both act in the best interests of their customer, he said, because agents are representatives of a company, the association fears the explanation could confuse consumers.

As a practical matter, producers should not have to explain the distinction and should just explain the nature of their compensation, he added. “Why get into something that doesn't matter to the relationship?” he said.

He also voiced concern over language governing renewals, saying there needs to be clarification as to how it applies to the personal and commercial lines relationships. “We would like to think that these issues can be resolved,” said Mr. Barrett.

Wesley Bissett, senior vice president for government affairs for the Independent Insurance Agents and Brokers of America, said the proposed regulation has negative implications nationally. “We are disappointed. This is a big problem and concern for us,” he noted.

He called the regulation a burden, citing the same concern as Mr. Barrett over explaining the agent-versus-broker relationship. Legally, he did not see how any producer could explain the relationship, or whether they are acting in the interests of the carrier or the consumer, since they may be doing both jobs interchangeably.

“It forces the agent to make a disclosure that they are unable to make,” said Mr. Bissett. “It is putting agents in a legally untenable situation.”

The rule “also exacerbates the lack of uniformity at the state level” he continued, because no other state has a rule similar to this or is contemplating it.

The regulation would also affect thousands of out-of-state agents who write business in New York, he said.

Mr. Bissett said he remains hopeful changes can be made. “The things we are asking for are not unreasonable by any stretch, but they are significant,” he added.

In an e-mail, Kenneth R. Auerbach, president of the Professional Insurance Agents of New York, said the association is working with the New York PIA affiliate, which has taken the lead on the issue.

Mr. Auerbach said from the outset PIA “has held that additional regulation about compensation disclosure in New York is unnecessary,” but worked with state officials nevertheless. The association is pleased with the current progress of discussions and plans to continue, he added. However, he said he did not see national implications for the regulations to spread further.

Nicole Allen, vice president of industry affairs for the Council of Insurance Agents and Brokers, said the regulations are consistent with the association's position that compensation disclosure “is good for the long term and good for business.”

However, some portions of the regulations still need clarification–similar to objections cited by Mr. Barrett and Mr. Bissett. She credited the department with broadening some aspects of the regulation, especially on estimating future compensation, that make it easier for producers to make the disclosure.

She said it does not appear that expansion of compensation disclosure regulations has much appeal outside of New York.

“We haven't seen any movement to get this on a nationwide basis,” according to Ms. Allen. “For us, uniformity is a big deal because our members are doing business across state lines, and we like to see state laws as uniform as possible. But [regulators] have not gained any traction on this and I don't know if they will now.”