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Frequently Asked Questions (FAQs) Regarding Circular Letter No. 20 (2017)

February 2018

DFS received questions from insurers about the guidance set forth in Circular Letter No. 20 (2017). The questions are summarized and answered below.

  1. Are bonus programs that pay producers compensation in addition to commissions permissible?

    Community Rated Products:  Bonus payments paid to producers in connection with the sale of community rated products violate community rating rules and conflict with the requirement of guaranteed availability of insurance products and are therefore not permissible.

    Community rating requires that insurers apply the same compensation scale to the sale of a policy form to any individual or group.  Bonus payments are not permitted since the compensation scale must be applied uniformly for all cases.

    Except as permitted by federal rules relating to open enrollment and special enrollment periods, guaranteed availability requires that insurers offering comprehensive medical products in the individual, small group or large group market must offer to any individual or employer in the State all comprehensive medical products approved for sale in the applicable market and must accept any individual or employer that applies for any of those products in the applicable market.  Producer compensation, including bonuses, that provides an incentive for producers to enroll healthier individuals or groups or to discourage producers from enrolling less healthy individuals or groups limit the availability of coverage and therefore violate the guaranteed availability rules.

    Experience Rated Products: Bonus payments may be acceptable when paid in connection with the sale of large group experience rated products but must still comply with the requirement of guaranteed availability of insurance products and may not be used in a manner resulting in an unfair method of competition or unfair discrimination. Bonuses paid on such products would be acceptable if based on a factor that is not related to determining risk (for example, a bonus program based on the number of groups enrolled by a producer would be permissible). Compensation that discourages producers from marketing to and/or enrolling groups and members based on their perceived level of risk would constitute an unfair method of competition and/or unfair discrimination and would violate the requirement of guaranteed availability of insurance products (for example, compensation that considers the age of enrollees would not be permissible). Insurers should review their bonus programs to ensure that they comply with law. If bonuses are available, insurers must clearly articulate the terms of the bonuses and include and describe in their rate filings the variables used to determine bonus payments.

  2. How does Circular Letter No. 20 (2017) apply to commission arrangements that are currently in effect?

    Circular Letter No. 20 (2017) provides guidance to ensure all insurers are operating under the same rules with respect to producer compensation arrangements.  Insurers are expected to be in compliance with the guidance therein, and should have already reviewed their existing compensation arrangements and submitted any necessary revisions to DFS.

    Insurers are responsible for assuring new filings meet the standards of the circular letter and are responsible for reviewing and revising existing programs to assure compliance.

  3. Are compensation arrangements paying bonuses for persistency and retention across all markets permissible?

    As set forth in Circular Letter No. 20 (2017), arrangements that pay producer bonuses in connection with the sale of community rated products violate community rating rules.  Accordingly, an insurer may not include community rated products in determining eligibility for, or the amount of, the bonus under a program rewarding persistency or retention.

Department of Financial Services

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