The Office of General Counsel issued the following opinion on October 31, 2003 representing the position of the New York State Insurance Department.
Re: Replacement of Long Term Care Insurance, Agents Compensation.
1. If an insured replaces an individual long term care insurance policy with another individual policy from a different insurer, is there a limitation on the compensation that may be paid to the insurance agent or broker?
2. Would the answer differ if the replacement were to a policy issued by the same insurer?
1. Yes, the compensation that may be paid to the agent or broker is limited.
2. No, the same limitations would apply.
The inquirer is an insurance agent licensed pursuant to New York Insurance Law § 2103(a) (McKinney 2000) and an insurance broker licensed pursuant to New York Insurance Law § 2104 (McKinney 2000) and pose the following hypothetical situations. A client has an existing long term care policy from Company A and decides to replace it with an "improved" policy from Company B. The premium on the Company B policy is much greater than the premium on the Company A policy. Alternatively, the replacement will be to another "improved" policy issued by Company A. In either event, you inquire whether there is a limitation on the compensation that may be paid to the producer.
The requirements applicable to individual long term insurance policies are set forth in N.Y. Comp. Codes R. & Regs. tit. 11, § 52.25 (2002) (Regulation 62).
The general limitations on commissions that may be paid to an insurance agent or broker for sale of an individual long term care insurance policy are set forth in N.Y. Comp. Codes R. & Regs. tit 11, § 52.25(e)(1):
An insurer may provide commissions or other compensation to an agent or other representative for the sale of a long term care insurance . . . insurance policy . . . at a higher level or amount during the first year the policy or certificate is in effect than is paid for selling or servicing the policy or certificate during the second year. However, all proposed first year commissions or compensation as well as renewal commissions or compensation shall be subject to review and approval to ensure that they are reasonable, not excessive, and not inconsistent with expected loss ratio requirements.
The minimum loss ratio for individual long term care insurance policies issued to insureds age 64 or under is 60% and for such policies issued to individuals age 65 and over is 65%. N.Y. Comp. Codes R. & Regs. tit. 11, § 52.45(h) (1998). When rate filings are made to the Department, one of the items reviewed are the proposed commissions, both first year and renewal. N.Y. Comp. Codes R. & Regs. tit. 11, § 52.16(40)(1)(iv) (2002).
Because issuance of a new individual long term care insurance policy will again expose the insured to pre-existing condition limitations, and since such policies are age rated, careful review of both long term care policies, the existing and proposed replacement, is necessary. The incentive for the agent to encourage replacements solely for increased first year commissions is minimized by a limitation of first year commissions that may be paid in replacement situations, N.Y. Comp. Codes R. & Regs. tit. 11, § 52.25(e)(3):
In a replacement situation no insurer shall provide compensation to its agents or other producers and no agent or producer shall receive compensation greater than the renewal compensation payable by the replacing insurer on renewal policies.
Therefore, while Company B may pay a commission based upon the entire premium; for the first year replacement business, it is limited to the rate of commission payable by it on renewal business.
There is nothing in N.Y. Comp Codes R. & Regs. tit. 11, §52/25(e) that would produce a different result if the replacement policy were to be issued by the same insurer.
For further information you may contact Principal Attorney Alan Rachlin at the New York City office.