Insurance Circular Letter No. 20 (2017)

November 21, 2017

TO: All Insurers Authorized to Write Accident and Health Insurance in New York State, Article 43 Corporations, and Health Maintenance Organizations

RE: Producer Compensation for Comprehensive Medical Policies and Contracts

STATUTORY AND REGULATORY REFERENCES: N.Y. Insurance Law §§ 2403, 3231, 4224, 4235(h), 4308, 4312, and 4317; 11 NYCRR 52 (Insurance Regulation 62) and 11 NYCRR 360 (Insurance Regulation 145); and 45 CFR §§ 147.104(e) and 156.225(b)

I. Purpose

The purpose of this circular letter is to provide guidance and clarification to insurers authorized to write accident and health insurance in this state, article 43 corporations, and health maintenance organizations (collectively, “issuers”) regarding state and federal requirements for filing commissions, compensation, and other fees or allowances (collectively, “compensation scales”) and paying compensation to insurance agents and brokers (collectively, “producers”) for comprehensive medical policies and contracts. The Department seeks to maintain affordable rates for consumers and ensure a level playing field for issuers and producers.

II. Discussion

A. Filing Requirements Generally

Insurance Law §§ 4235(h) and 4312 and §§ 52.40(c) and (e) of 11 NYCRR (Insurance Regulation 62) require an issuer to file its rate filings, rate manual, and schedule of premium rates, including for comprehensive medical policies and contracts, with the Superintendent of Financial Services (“Superintendent”) and include the compensation scales paid to producers. All such producer compensation scales must be filed with, and accepted by, the Superintendent before implementation. In addition, §§ 52.40 (d), (e) and (j) and 52.42(e) require that all issuers’ rate filings for individual, small group, and large group markets include commissions and other payments, if any, to producers.

An issuer’s filed rates must contain sufficient information to determine the amount of producer compensation payable by the issuer in connection with a particular policy. Filed rates that include compensation scales must articulate the amount of producer compensation payable and include all variables used to determine that amount, such as the level of services performed in connection with the sale of insurance, or otherwise provided for in the insurance contract. Additionally, compensation scales must articulate when and how those variables are applied. Insurance Law § 4224 prohibits discrimination and rebating as well as certain inducements and interdependent sales by producers. Where different levels of compensation are permitted, as is the case for non-community rated policies or contracts, in order to comply with Insurance Law § 4224, any variables determining compensation must be articulated and justified in the proposed rate filing.  The variables dictating producer compensation associated with a particular policy form must be applied consistently to that policy form.  The amount of compensation paid to a particular producer may not affect the premium charged by the issuer unless the variables and criteria for applying those variables are clearly articulated in the issuer’s filed rates and uniformly applied.  The Department will not approve compensation arrangements that would result in a premium that is excessive.

B. Producer Compensation Only Filings

Issuers may supplement filed rates to include or amend producer compensation scales. The signed actuarial memorandum required by § 52.40(a) accompanying such “producer compensation only” filings must affirm that: (1) the issuer is not modifying any premium rates currently on file; and (2) any producer compensation proposed will not cause the minimum loss ratio for the policy or contract form associated with the filing to fall below the applicable standard.

C. Producer Compensation and Guaranteed Availability of Coverage: Issuers shall not Pay Producer Compensation that Inhibits Access to Coverage

In accordance with § 52.40¹, an issuer must submit to the Superintendent its underwriting guidelines for all comprehensive medical policies and contracts in order to ensure that the guidelines comply with applicable state and federal law and regulations, including state and federal rules regarding guaranteed availability of coverage. See Insurance Law §§ 3231 and 4317 and 45 CFR § 147.104. Producer compensation arrangements that provide an incentive for producers to enroll healthier individuals or discourage producers from enrolling less healthy individuals limit the availability of coverage, evade underwriting rules, and would be considered an unfair method of competition. See Insurance Law §§ 2403 and 4224(b)(1) and 45 CFR § 156.225(b). Examples of unacceptable arrangements include compensation arrangements encouraging sole product offerings (an agreement between the issuer and an insured group that only the issuer’s products will be offered to that group), compensation dependent upon the number of enrollees in a group policy or contract, and compensation that is not paid until the producer has sold a specific number of policies or contracts or a specific number of lives are covered.

D. Small Group Community Rated Policies and Contracts

Section 360.11(k) of 11 NYCRR 360 (Insurance Regulation 145) provides that commissions and marketing practices in the small group market must be uniformly applied to all size cases (all groups issued a specific policy or contract) and the issuer must pay commissions using the same commission scale for all cases. Section 360.11(k) further states that commission scales may be paid only as: (1) a flat percentage of premium; (2) a percentage of premium that decreases as premium increases; (3) a flat dollar amount per person; or (4) a flat dollar amount per case. Bonuses, including additional payments to a producer based on factors such as volume or type of enrollments, paid on the sale of small group policies or contracts would result in compensation scales that do not comply with Insurance Regulation 145 and are not permitted.

III. Conclusion

Issuers should adhere to the guidance on producer compensation arrangements as described in this circular letter. Please direct any questions regarding this circular letter to Frank Horn, Assistant Chief Actuary, Health Bureau, New York State Department of Financial Services, One Commerce Plaza Albany, NY 12257 or by e-mail at [email protected].

Very truly yours,

Lisette Johnson
Bureau Chief, Health Bureau

¹ Section 52.40(c)(2)(vii), (d), (e)(2), (f), and (g) require issuers’ underwriting rules be filed with the Superintendent.