OGC Op. No. 11-01-09

The Office of General Counsel issued the following opinion on January 31, 2011 representing the position of the New York State Insurance Department.

Re: Disclosure of Compensation Paid to Managing General Agents

Question Presented:

If a purchaser requests, must a managing general agent (“MGA”) that sells an insurance policy directly to the purchaser disclose, pursuant to Regulation 194, the amount of compensation that the insurer pays the MGA for undertaking the insurer’s underwriting, loss, inspection, processing, and claims responsibilities, when the compensation is based in whole or in part on the sale of the policy?

Conclusion:

Yes. If the MGA sells an insurance policy directly to a purchaser, and the purchaser asks, then the MGA must disclose pursuant to Regulation 194 any compensation, based in whole or in part on the sale of the policy that the insurer pays the MGA, including any compensation for underwriting, loss, inspection, processing, and claims responsibilities. However, nothing in Regulation 194 prohibits the MGA from disclosing additional information that is accurate and not misleading about the MGA, including that the compensation received for the sale may not be readily comparable due to differences in insurers’ distribution systems and compensation structures.

Facts:

The inquirer states that its firm represents an MGA, which has undertaken an insurer’s underwriting, loss, inspection, processing, and claims responsibilities. In general, the MGA appoints that insurer’s producers. In turn, for each contract of insurance placed, the insurer pays the MGA a percentage of the premium representing the costs of underwriting, and other expenses, including the producers’ commissions, which the MGA distributes to the producers.

However, in some instances, the MGA itself directly contacts potential insureds and sells insurance. In those instances, the inquirer asks whether the MGA also must disclose pursuant to Regulation 194 the amount of compensation that the insurer pays it for underwriting and other expenses.

Analysis:

Regulation 194 took effect on January 1, 2011. Regulation 194 is intended to provide a means to address the potential conflicts of interest that arise due to the incentive-based compensation an insurer pays to its producers in the least invasive manner possible – by requiring that insurance producers make certain disclosures to insurance customers about the producers’ role in the insurance transaction and their compensation arrangements with insurers. Specifically, the regulation requires an insurance producer to disclose its role in the transaction, that the producer will receive compensation from the insurer based upon the sale of the policy, that the compensation paid by insurers may vary, and that the purchaser may obtain from the producer, upon request, information about the compensation the producer expects to receive from the sale of the policy. The regulation also requires that upon the customer’s request, the producer disclose the amount of compensation paid for the policy selected and any alternative quotes presented. The required disclosures will help producers and consumers manage the potential conflicts that arise from producer compensation because they allow insurance customers to request information about the compensation for the insurance policy and alternative policies quoted.

Section 30.3 of Regulation 194 states that:

(a) Except as provided in section 30.5 of this Part, an insurance producer selling an insurance contract shall disclose the following information to the purchaser orally or in a prominent writing at or prior to the time of application for the insurance contract:

(1) a description of the role of the insurance producer in the sale;

(2) whether the insurance producer will receive compensation from the selling insurer or other third party based in whole or in part on the insurance contract the producer sells;

(3) that the compensation paid to the insurance producer may vary depending on a number of factors, including (if applicable) the insurance contract and the insurer that the purchaser selects, the volume of business the producer provides to the insurer or the profitability of the insurance contracts that the producer provides to the insurer; and

(4) that the purchaser may obtain information about the compensation expected to be received by the producer based in whole or in part on the sale, and the compensation expected to be received based in whole or in part on any alternative quotes presented by the producer, by requesting such information from the producer.

Accordingly, a producer must describe the producer’s role in a particular sale, and disclose whether the producer will receive compensation based in whole or in part on the insurance contract that the producer sells. However, § 30.5 contains exceptions to disclosure in certain circumstances including under § 30.5(c) if the producer has no direct sales or solicitation contact with the purchaser, which may include wholesale brokers or MGAs, as is so often the case with MGAs. However, if an MGA does have such contact, as in the examples, then it remains subject to the regulation.

The inquirer states that the insurer compensates its client, the MGA, based on each contract sold. Thus, if the purchaser requests further information, pursuant to § 30.3(b) the MGA must disclose all compensation for that sale. Although the MGA earns compensation for underwriting, and other expenses, Regulation 194 makes no exception from disclosure for those sorts of compensation if the compensation is based in whole or in part on the sale. Under Regulation 194, “compensation” means “anything of value whether paid as commission or otherwise.” Accordingly, an MGA that sells an insurance policy directly to the purchaser must disclose pursuant to Regulation 194 the compensation that the insurer pays the MGA, including the compensation for underwriting, loss, inspection, processing, and claims responsibilities, when compensation is based in whole or in part on the sale, which is the case in the example.

However, nothing in Regulation 194 prohibits the MGA from disclosing additional information that is accurate and not misleading about the MGA, including that the compensation received for the sale may not be readily comparable due to differences in insurers’ distribution systems and compensation structures. See e.g., CL 18 (2010).

For further information, you may contact Senior Attorney Sapna S. Maloor at the New York City office.