REVISED NOTICE OF PUBLIC HEARING
Superintendent of Insurance and Attorney General
(New matter is underlined; matter in brackets is deleted)
Pursuant to Sections
201 and 301 and Articles 21 and 24 of the Insurance Law, the Superintendent
of Insurance and the Attorney General will conduct Public Hearings in New York City,
Albany, and Buffalo to obtain the views of interested persons about the proposed addition
of a new regulation to the Insurance Department’s regulations (Title 11 of the
New York Code of Rules and Regulations) regarding permissible forms of insurance producer
compensation and disclosure by insurance producers of all forms of compensation.
In 2004, the Attorney General and the Superintendent conducted investigations of a number of insurance brokers and insurers to determine whether certain types of producer compensation led to deceptive business practices by brokers and insurers. The investigations also focused on whether there was adequate disclosure of compensation to clients. The Attorney General and the Superintendent alleged that at many companies, payment of contingent compensation led insurance producers to steer their clients to insurers paying the producers the most compensation. The Attorney General and the Superintendent also alleged that the then current level of disclosure did not properly inform clients of the compensation to be received.
As a result, the Attorney General and the Superintendent entered into a number of agreements and stipulations that prohibited the receipt of contingent commissions by certain insurance brokers; prohibited the payment of contingent compensation by certain insurers for certain lines of insurance; provided a mechanism for expansion of the prohibition of contingent compensation to additional lines of insurance; and required substantial improvements in the disclosure of producer compensation provided to certain producers’ clients. The agreements, however, did not include all the producers and insurers doing business in New York.
The Superintendent of Insurance is empowered under the Insurance Law to prescribe regulations interpreting the provisions of the Insurance Law. Insurance Law Section 2101(k) defines "insurance producer” to mean an insurance agent, insurance broker, reinsurance intermediary, excess lines broker, or any other person required to be licensed under the laws of this State to sell, solicit or negotiate insurance.
The proposed regulation will address the issue of “producer compensation” for the market as a whole. For purposes of the proposed regulation, “compensation” shall mean anything of value, including money, credits, loans, interest on premium, forgiveness of principal or interest, vacations, prizes, gifts or the payment of employee salaries or expenses, whether paid as commission or otherwise, but shall not include benefits provided to an insurance agent from an insurer as part of the insurer’s employee benefit plan where benefits are similarly provided to non-agent employees.
The Superintendent and the Attorney General seek the views of interested parties on whether insurance producers in this State should be required to make full disclosure to the insured, and obtain its consent, in writing of any compensation from an insurer or other entity relating to the issuance, renewal or servicing of the insured’s insurance policy or annuity contract.
The Superintendent and the Attorney General also seek views about contingent commissions, and whether such compensation creates an irreconcilable conflict of interest for producers.
Independent insurance producers (as opposed to captive agents who write business exclusively for a single insurer) generally receive two types of compensation. The first is a flat percentage commission based on premium volume paid at the time of sale. There may be different flat rates paid for new and renewal business.
The second is a contingent commission, which may be paid in addition to flat percentage commissions, and which typically is based on profit, volume, retention, and/or business growth. Contingent commissions are not payable on a per risk basis, but are allocated based on the performance of the entire portfolio of business placed with a particular insurer. The contingent commission schedule is known to producers at the beginning of a given period of time (usually one year), but contingent commissions actually earned are calculated some period after business is placed and loss experience is observed.
Some insurers also pay supplemental commissions. Supplemental commissions are similar to contingent commissions in that an incentive structure based on profit, volume, retention, and/or business growth is generally put in place at the beginning of a given year. But under a supplemental system, rather than paying additional cash commissions at the end of the year, the incentive structure is used to reset the flat percentage commission for the following year.
According to critics, contingent commissions create a conflict of interest for ostensibly independent producers. Contingent commissions are paid to such producers based on the volume and profitability of business that they refer to insurers. The size and structure of the contingent commissions that insurers offer to intermediaries therefore can vary significantly and can lead to abuses such as improper "steering" of clients to insurers that allegedly fail to provide coverage as beneficial as that offered by competitors.
Defenders of contingent commissions argue that competition in the marketplace can adequately address any conflicts. They also point out that the conflicts of interest created by contingent commissions are also inherent in the payment of supplemental and flat percentage commissions.
The Attorney General and the Superintendent are interested in learning to what extent contingent, supplemental and flat percentage commissions are currently leading to steering or other deceptive or anti-competitive practices in the marketplace, and to understand what mechanisms are most effective to curb such practices.
In particular, oral and written testimony should address topics pertaining to the form and disclosure of producer compensation (including contingent commissions) such as: whether disclosure of compensation is necessary; whether disclosure requirements should apply to all agents and brokers; whether disclosure should be required when the amount of producer compensation cannot be ascertained at the outset of the customer/producer relationship; whether there are certain categories of transactions that should be exempted from some or all disclosure requirements; whether certain types of compensation should be permissible and whether steering associated with contingent commissions should be considered an unfair act or practice within the meaning of Article 24 of the Insurance Law.
The public hearings are scheduled as follows:
Buffalo & Erie County Public Library
1 Lafayette Square
Buffalo, NY 14203
State Education Building
89 Washington Ave
Albany, NY 12234
New York University
Eisner & Lubin Auditorium
Helen and Martin Kimmel Center for University Life
60 Washington Square South
New York, NY 10012
The hearings are open to the public. Interested parties may testify at these hearings, or submit written comments to be included in the hearing record. Any person wishing to testify should contact the Insurance Department's Public Affairs Bureau at (212) 480-5262. Oral testimony will be allowed for up to 5 minutes.
Written comments for the hearing record may be submitted to Broker Compensation Hearings, Public Affairs Bureau, New York State Insurance Department, 25 Beaver Street, New York, NY 10004, or e-mailed to PublicHearingsComments@ins.state.ny.us with the subject line “BROKER COMPENSATION HEARINGS.” Comments will be accepted by the Department for up to 15 business days after the public hearing.For additional information about this hearing, please contact Ellen Buxbaum, Associate Counsel - Special Investigations at (212) 480-6254 or by e-mail at EBuxbaum@ins.state.ny.us.