NAIC Broker Comp Rules Under Fire
May 2, 2005
A proposed amendment to the already-adopted National Association of Insurance Commissioners' (NAIC) model legislation calling for broker disclosure is already raising serious concerns.
At the center of the controversy is the amendment's proposed subsection B, which would require disclosure by any producer receiving compensation from the insurer or a third party.
Fortunately, this subsection was excluded from the NAIC's year-end 2004 adoption of the model legislation, which amended NAIC's Producer Licensing Model Act.
The NAIC task force on broker activity, however, has said it would continue to review subsection B. Its goal is to achieve a consensus on issues that include fiduciary duty, disclosure of all quotes and producer-owned reinsurance arrangements.
The new NAIC model legislation sets new disclosure requirements so that consumers can understand how brokers get paid for the sale of life and property and casualty insurance products. The controversial proposed amendment stems from New York Attorney General Eliot Spitzer's charge that several brokerage firms accepted kickbacks and rigged bids for corporate liability insurance.
Door Wide Open
The insurance industry contends that the proposed amendment's language regarding compensation is too broad and could hamstring insurers and producers. Section A of the law, they say, already states that the producer must disclose insurance company and client compensation. Subsection B, insurers contend, is generic and leaves too much room for interpretation.
Michael Lovendusky, associate general counsel for the American Council of Life Insurers (ACLI) of Washington, said there are several problems with subsection B. For one, the disclosure should not apply to insurance sold in the normal course of business by captive or independent insurance agents. "Everyone already understands that when you deal with an insurance agent, he or she gets compensated by the insurance company they represent," he said.
Insurers say the sale of different types of insurance products requires different types of disclosures. But subsection B disclosure is a one-size-fits all rule.
Lovendusky said brokerage firms also cite problems with the amendment. A broker who sells life insurance products would be required to disclose compensation, he noted.
"The broker is hired by the customer, so the disclosure rules in section A apply," he said. "The broker would be obliged to disclose compensation received from selling different insurance products."
Further, section A rules already are designed to prevent brokers from getting kickbacks for selling products from insurance companies, but under the broad provisions of subsection B, brokers would have to disclose compensation on their large inventory of life insurance products. All this information would confuse and overwhelm potential buyers and hurt sales, said Whit Cornman, a spokesperson for ACLI.
Peter A. Bisbecos, director of regulatory affairs for the National Association of Mutual Insurance Companies (NAMIC) of Washington, said that the disclosure of compensation should apply strictly to transactions in which the producer gets compensated by the consumer and the insurance company. It would not apply to other types of transactions that involve compensation.
At issue, he said, is this key question: "Would producers have to check with a large number of insurance companies aside from those that pay them commissions? The lack of clarity in the subsection B rule could lead to allegations of criminal activity.
"NAMIC stressed that the solution to the one defined problem to date-when a producer receives compensation from both parties-is appropriate," he said. "NAMIC agrees that the burden of disclosing that a producer is compensated by both parties is balanced with the value that such disclosure adds to the insurance buying process. To date, other problems remain the product of allusion, and should not be subject to legislation."
John C. Mancini, executive director of regulatory compliance with USAA Life Insurance Co., San Antonio, agreed. "We are especially concerned that the proposed language could be broad enough to sweep transactions that could never lead to the conflicts of interest that gave rise to the abuses uncovered in recent investigations.
"We are also concerned that by proposing the addition of this new subsection, the NAIC appears to be expanding the scope of the amendment to include broad compensation disclosure provisions, which go well beyond what is needed to address the abuses identified by the investigations."
Meanwhile the insurance industry also has issues with NAIC interest in requiring producers to be regulated as fiduciaries. NAIC has requested comments on this issue along with the request for feedback on subsection B of the model law.
"The statutory imposition of fiduciary duties on insurance producers would be unprecedented," said a letter sent to the NAIC on behalf of the ACLI, the Association for Advanced Life Underwriting, the National Association of Insurance and Financial Advisors and the National Association of Independent Life Brokerage Agencies. "We have been unable to identify a single state that imposes any general fiduciary duties on insurance producers by statute."
In addition, the ACLI said that the statutory imposition of prescribed fiduciary duties would be unwarranted.
"There are well-developed common law doctrines and principles delineating the contours of the duties agents and brokers owe to their clients. As that case law makes clear, the scope and extent of any such duties are determined based on the contractual agreement or understanding between the producer and client."