Do insurance agents and brokers have to tell their clients what their financial incentives are? In New York, as of Jan. 1, 2011, the answer is yes.

Insurance Regulation 194, "Producer Compensation Transparency," requires all New York-licensed producers to offer unrequested information about their compensation to their clients. If a client asks for more information, the producer must make a second highly detailed disclosure.

Lest you think this is a New York issue only, remember that it applies to anyone, resident or non-resident, that New York law requires to hold an agent, broker, or intermediary license. If you're a Tennessee agent with a New York non-resident's license, this regulation applies to you.

Regulation 194 states that a producer (meaning the agency, not the individual agent) must, orally or in "a prominent writing" at or before the time of application for the policy, give the buyer the following information:

  • A description of the producer's role in the sale;
  • Whether the producer will receive compensation from the selling insurer or a third party based wholly or partly on the sale of the policy;
  • That the producer's compensation may vary depending on several factors, such as the type of policy, the insurer the buyer chose, and the volume and profitability of business the producer writes with that insurer; and
  • That, by requesting it, the buyer may obtain more information about the producer's compensation for that policy and the compensation he would have received for any alternative quotes he presented.

These requirements do not call for a lot of detail. However, if the buyer requests more information before the insurer issues the policy, the producer has until the time of policy issuance (or within five business days, if time is running out) to disclose a lot more detail.

To illustrate, say that you sold a business owner's policy from Big National Insurance Co. You're a Big National agent, so they will pay you 15 percent commission on the policy premium, they might pay you one-to-five points of profit-sharing on your book if you qualify, and they're dangling a trip to the Bahamas for sales superstars.

You also presented quotes from Small Regional Insurance Co. and Medium Insurance Co. The three quotes had many similarities, but there were some differences in hired and non-owned auto coverage, umbrella limits, and deductibles, and Big National's price was 10 percent lower.

If the client asks about your compensation, you will have to tell her:

  • About your actual and potential compensation from Big National, including commission, profit-sharing, and the week in the Bahamas;
  • The coverages Small Regional and Medium offered, their quoted premiums, and what they would have paid you for the sale, including incentives;
  • Whether your agency is part owner of Big National and whether they're part owner of your agency; and
  • Whether New York law forbids you from cutting your commission to reduce the premium (Hint: It does.)

A few things to keep in mind. First, you must provide this detailed disclosure only if the buyer asks you a question about your compensation. You do not have to volunteer it. However, you must supply all the detail in response to any question about compensation.

Second, Regulation 194 does not apply to the following:

  • Reinsurance placements;
  • Placements with a single-owner or industrial group-owned captive insurance company;
  • Wholesale brokers and managing general agents who have no direct contact with the buyer;
  • Insurance sales by a person who does not have to have a license; and
  • Renewals.

However, you must give the detailed disclosure to a renewal customer if she requests it during the period 30 days before the renewal date and until 30 days after.

You should be aware that the regulation defines "compensation" in broad terms, including credits, loans, interest on funds in a producer's premium account, forgiven loans or interest, trips, prizes, and gifts. The only things exempt are tangible goods with an insurer's logo on them that, as a group, are worth less than $100 per year. Think coffee mugs. Additionally, insurance companies have to keep records of what they pay their producers, but they can delegate that duty back to the agents.

I've simplified this summary, so check the regulation's text to determine how it applies to your situation. Regulation 194 is an adjustment for everyone. To help producers in and outside of New York comply, IIABNY has provided sample disclosure forms and an FAQ page on its Web site. Also, IIABNY is working with ACORD, the insurance industry's global, non-profit standards development organization, to develop a standard form that producers can use to make the first disclosure.

IIABNY opposes the regulation and may well continue to lead the fight in court. In the meantime, if your clients ask what you make, tell them and explain why you're worth it.

Because you are.

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