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Rebates, Nondiscrimination and Compensation

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Title: Rebates, Nondiscrimination and Compensation


1
Rebates, Nondiscrimination and Compensation
  • Alaska Division of Insurance
  • Public Meeting
  • November 13, 2008

2
Purpose of Meeting
  • Review of Alaskas rebating anddiscrimination
    laws.
  • Review divisions enforcement of these laws.
  • We will not be making decisions on specific
    rebating or discrimination questions at this
    meeting.
  • Receive input from participants as to what, if
    any, changes should be made to Alaskas rebating
    and discrimination laws.

3
What is Rebating?
  • Paying, allowing, giving or offering to pay,
    allow or give anything of value to an applicant
    or insured as an inducement to insurance.
  • Two Key Phrases
  • Inducement
  • Anything of value

4
History
  • Every state has anti-rebating laws.
  • Rebating was a common practice in the late 19th
    and early 20th centuries.
  • Rebating primarily involved discounting life
    insurance premium 50 or more.
  • Discount was not offered to all consumers.

5
History
  • Late 19th and early 20th centuries saw the rise
    of urban industrial society and the decline of
    agrarian-based communities.
  • Families became moredependent on wages
  • When the breadwinner died,their families did not
    havethe same support systemavailable asin the
    agrarian communities.

6
History
  • Changing society structure lead to growth inlife
    insurance industry.
  • Expansion resulted from
  • High pressure sales
  • Deceptive policies
  • High agent commissions

7
History
  • High commissions provided agentswith funds they
    could rebate toreluctant consumers to get them
    topurchase insurance from theagents company.
  • Inequality and discrimination sincerebates were
    not given toall consumers.

8
Anti-Rebate Statutes
  • MA passed the first anti-rebate statute in 1887.
  • 21 more by 1895.
  • 30 companies agreed to discontinue practice.
  • Practice did not cease in the continuing
    competitive market and depression of the 1890s
    and high commissions and rebates continued.
  • Alaskas anti-rebate law was adopted in 1966
    based on an NAIC model and has remained
    essentially unchanged.

9
Anti-Rebate Statutes
  • Primary Reasons for Prohibiting Rebating
  • Protect smaller insurers and insurance agencies
    that could be driven out of business by larger
    insurers and agencies that can afford to offer
    smaller premiums or commissions (prevents
    monopolization).
  • Protect policyholders that do not have the
    leverage to negotiate lower commissions or
    premiums such as individuals and small employers.
  • Help ensure that policyholders of similar risk
    aretreated fairly.
  • Forces insurance agencies and insurers to compete
    on services and benefits.

10
Rate Regulation
  • 1909 KS enacted the first rate regulatory law
    including anti-rebate language.
  • Same goals as anti-rebate laws.
  • Protect companies from insolvencies
  • Prevent unfair discrimination between applicants
  • Protect consumers from exorbitant rates

11
Unfair Discrimination
  • Unfair discrimination is prohibited underAlaska
    law.
  • Discrimination is unequal treatment of similarly
    situated consumers.
  • Include commission as part of the rate regulation
    scheme so that all pay appropriate share of
    company and agent costs of selling a policy.
  • Standard structure
  • Any rebates would be based on legitimate
    differences in expenses

12
Do We Still Need Anti-Rebate Laws?
  • Public policy reasons to supportthese laws
  • Rebates may lead consumers to buy new or
    replacement life policies year after year
    impacting solvency of insurer.
  • Rebates may result in consumers going to other
    states to make large insurance purchases making
    regulatory oversight difficult.
  • Unrestricted rebating keeps prices hidden and
    unavailable for monitoring discrimination.
  • Rebating may jeopardize the livelihood of smaller
    producers, opening the door to concentration of
    business and monopolistic practices.

13
Do We Still Need Anti-Rebate Laws?
  • Public policy reasons to support these laws
    (cont.)
  • Rebating may de-emphasize producer advice and
    service to the detriment of consumers.
  • Insurers may experience adverse selection and
    increased costs.
  • Rebates will result in increased policy lapses.
  • Rebates will result in unfair discrimination
    among policyholders, particularly those with
    little or no economic leverage.
  • Rebates will render ineffective some cost
    disclosure requirements which are considered a
    fundamental life insurer consumer protection
    device.

14
Do We Still Need Anti-Rebate Laws?
  • Public policy reasons to support these laws
    (cont.)
  • Rebates will result in a diminishment of the life
    insurance business as a source of investment
    capital for the nation as consumers replace
    policies to obtain rebates.
  • Rebates will result in new contestable periods
    for insureds replacing their coverage resulting
    in lack of coverage for many.
  • Rebates will result in undue consumer emphasis on
    price over quality of product.
  • Even well-intentioned deregulation will result in
    unanticipated negative consequences for the
    general public such as sharp business practices
    by producers.

15
Do We Still Need Anti-Rebate Laws?
  • Public policy reasons to repeal these laws
  • Many policyholders see no objection to rebating
    and prefer the free market with its resulting
    price competition.
  • Although originally enacted to prevent
    monopolization, they are seen as anticompetitive
    today.
  • Rebating is difficult to detect and impossible to
    prove.
  • Rebating laws should no longer be used to justify
    the outdated goal of preserving the agency system
    by keeping up the compensation level.
  • Concern for insurer solvency is no longer an
    adequate basis as other solvency regulatory tools
    now exist.

16
Life and Annuity Discrimination
  • AS 21.36.090
  • (a) A person may not make orpermit unfair
    discriminationbetween individuals of thesame
    class and equal expectation of life in therates
    charged for a contract oflife insurance or of
    life annuityor in the dividends or
    otherbenefits payable thereon or in any other of
    the terms and conditions of the contract.

17
Health Discrimination
  • AS 21.36.090
  • (b) A person may not make or permit unfair
    discrimination between individuals of the same
    class and of essentially the same hazard in the
    amount of premium, policy fees, or ratescharged
    for a policy or contractof health insurance or
    in thebenefits payable, or in anyof the terms
    or conditions ofthe contract, or in any
    othermanner whatever.

18
Health Discrimination (cont.)
  • AS 21.54.100
  • a) A health care insurer that offers, issues for
    delivery, delivers, or renews a health care
    insurance plan in the group market may not
    establish rules for eligibility, including
    continued eligibility and waiting periods under
    the plan, for an individual or dependent of an
    individual based on health status medical
    condition, including physical and mental
    illnesses claims experience receipt of health
    care medical history genetic information
    evidence of insurability, including conditions
    arising from acts of domestic violence or
    disability.

19
Health Discrimination (cont.)
  • AS 21.54.100
  • (b) A health care insurer may not require an
    individual, as a condition of enrollment or
    continued enrollment under a health care
    insurance plan offered in the group market, to
    pay a premium, contribution, or policy fee
    greater than a premium, contribution, or policy
    fee for a similarly situated individual already
    enrolled in the plan on the basis of a health
    status factor for the individual or a dependent
    of the individual.

20
Life, Annuity, HealthAnti-Rebating Statute
  • AS 21.36.100
  • Except as otherwise expressly provided by law, a
    person may not knowingly permit or offer to make
    or make a contract of life insurance, life
    annuity or health insurance, or agreement under
    the contract other than as plainly expressed in
    the contract, or pay, allow, give or offer to
    pay, allow, or give, directly or indirectly, as
    inducement to the insurance, or annuity, a rebate
    of premiums payable on the contract, or a special
    favor or advantage in the dividends or other
    benefits, or paid employment or contract for
    services of any kind, or any valuable
    consideration or inducement whatever not
    specified in the contract or

21
Life, Annuity, HealthAnti-Rebating Statute
(cont.)
  • directly or indirectly give, sell, purchase or
    offer to agree to give, sell, purchase, or allow
    as inducement to the insurance or annuity or in
    connection therewith, whether or not to be
    specified in the policy or contract, an agreement
    of any form or nature promising returns, profits,
    stocks, bonds, or other securities, or interest
    present or contingent in the contract or as
    measured by the contract, of an insurance company
    or other corporation, association, or
    partnership, or dividends or profits accrued or
    to accrue under the contract or offer, promise,
    or give anything of value that is not specified
    in the contract.

22
Life, Annuity, HealthExceptions to
Discrimination and Rebate Statutes
  • Nothing in AS 21.36.090 and 21.36.100 may be
    construed as including within the definition of
    discrimination or rebates any of the following
    practices
  • (1) in the case of a contract of life insurance
    or life annuity, paying bonuses to policyholders
    or otherwise abating their premiums in whole or
    in part out of surplus accumulated from
    nonparticipating insurance, if the bonuses, or
    abatement of premiums are fair and equitable to
    policyholders and for the best interests of the
    insurer

Examples universal life paying premium with cash
values, bonus interest
23
Life, Annuity, HealthExceptions to
Discrimination and Rebate Statutes (cont.)
  • (2) in the case of life insurance policies issued
    on the industrial debit, preauthorized check,
    bank draft, or similar plans, making allowance to
    policyholders who have continuously for a
    specified period made premium payments directly
    to an office of the insurer or by preauthorized
    check, bank draft, or similar plan, in an amount
    that fairly represents the saving in collection
    expense
  • Example Industrial debit life of which little
    or no business is written anymore

24
Life, Annuity, HealthExceptions to
Discrimination and Rebate Statutes (cont.)
  • (3) readjustment of the rate of premium for a
    group insurance policy based on the loss or
    expense experience thereunder, at the end of the
    first or a subsequent policy year of insurance
    thereunder, which may be made retroactive only
    for that policy year

Example large group experience rated
plans-reducing current premiums based on prior
year loss experience
25
Life, Annuity, HealthExceptions to
Discrimination and Rebate Statutes (cont.)
  • (4) issuance of life or health insurance policies
    or annuity contracts at rates less than the usual
    rates of premiums for the policies or contracts,
    or modification of premium or rate based on
    amount of insurance but the issuance or
    modification shall not result in reduction in
    premium or rate in excess of savings in
    administration and issuance expenses reasonably
    attributable to the policies or contracts.
  • Examples Lower premium for larger policy
    amounts (economy of scale), savings under payroll
    deduction plans, auto-pay plan savings

26
Life and Health Rebating Inquiries
  • Negotiated commissions, reducing premium by
    reducing commission.
  • Reduction in premium or other incentive for
    participation in wellness programs.
  • Drawings/gifts.
  • Free or reduced cost administrative services (ex
    FSA administration, HR/employee benefit
    consulting).
  • Health discount cards at no cost.

NOTE The Division is considering legislation to
specifically allow rewards or incentives for
wellness programs consistent with federal HIPAA
nondiscrimination laws.
27
PC Anti-Rebate Laws
  • AS 21.36.120(a)
  • Who
  • property, casualty or surety insurer
  • Employee or representative of the insurer
  • Agent or solicitor
  • What
  • May not pay, allow, give
  • May not offer to pay, allow or give
  • How
  • Directly or indirectly
  • When
  • As an inducement to insurance
  • Or after insurance has been effected

28
PC Anti-Rebate Laws
  • AS 21.36.120(a)
  • What If not specified in the policy
  • Rebate
  • Discount
  • Abatement
  • Credit
  • Reduction of the premium
  • Special favor or advantage in the dividends or
    other benefits
  • Any valuable consideration or inducement

29
PC Anti-Rebate Laws
  • AS 21.36.120(b)
  • Who
  • Insured
  • Employee of the insured
  • What
  • May not knowingly receiveor accept
  • How
  • Directly or indirectly

30
PC Anti-Rebate Laws
  • AS 21.36.120(b)
  • What
  • Rebate
  • Discount
  • Abatement
  • Credit
  • Reduction of premium
  • Special favor or advantage
  • Valuable consideration
  • inducement

31
PC Unfair Discrimination Law
  • AS 21.36.120(c)
  • Who
  • An insurer
  • What
  • May not make or permit unfairdiscrimination
  • In the premium or ratescharged for insurance
  • In the dividends or otherbenefits payable
  • In any other terms and conditions of the
    insurance
  • How
  • Between insureds or property having like insuring
    or risk characteristics

32
PC Unfair Discrimination Laws
  • AS 21.36.090(c)
  • Who
  • A person
  • What
  • May not make or permit arbitrary or unfair
    discrimination
  • In the premium or rates charged for a policy or
    contract of property, casualty, surety, marine,
    wet marine or transportation insurance
  • In the dividends or other benefits payable on the
    insurance
  • In the selection of it
  • In any other terms and conditions of the
    insurance
  • How
  • Between insureds or property having like insuring
    or risk characteristics

33
PC Anti-Rebate Laws
  • AS 21.36.120(d)
  • Payment of commission or compensation underAS
    21.27 is not prohibited
  • Allowing or returning to participatingpolicyholde
    rs, members or subscribers
  • Lawful dividends
  • Savings
  • Unabsorbed premium deposits
  • is not prohibited

34
Property/Casualty Rebating Inquiries
  • Can one insurer have different commission levels
    for the same product?
  • Yes, if
  • All commission levels are available to all
    producers and
  • Each producer selects a specific commission level
    and uses it for all of his/her customers
  • No, if
  • Some commission levels are only available to some
    producers or
  • Each producer selects a specific commission level
    on a customer by customer basis

35
Property/Casualty Rebating Inquiries
  • Can an insurer offer airline miles inexchange
    for obtaining aninsurance quote?
  • Does an endorsement by an entity(Better Business
    Bureau) of aninsurance product, or the
    agencyselling the product, in return forwhich
    the producer would return to them a small
    percentage of collected commission violate the
    anti-rebate laws?

36
Property/Casualty Rebating Inquiries
  • Can a producer cap his/hercommission and return
    theexcess to the client or usethe excess and
    apply it tofuture years commission costs?
  • Can an automobile windshieldrepair shop waive a
    customersdeductible?
  • Can an insurer waive an insureds deductible if
    the insured uses a preferred repair shop?

37
Property/Casualty Rebating Inquiries
  • Can an insurer offer a discountfor purchasing
    insurance viaan 800 number or via the internet?
  • Policy language statingthat each insured may
    receivefrom time to time as offered bythe
    insurer promotional offers including gift cards,
    coupons, gift certificates, items of merchandise
    and similar promotional items. In no case shall
    those offers exceed a value of 25.00.

38
Producer Compensation Options
  • Title 21, Chapter 27 provides authority, in
    specificcircumstances for a producer to
    compensate a person, directly or indirectly
    involved with an insurance sale.
  • Allowances to permit this to occur are contingent
    onseveral factors.

39
Statutory Allowances
  • 1) Sharing commission or compensation with
    another licensee.
  • 2) Paying a referral fee to an unlicensed
    person.
  • 3) Sharing a commission or compensation with an
    unlicensed person
  • Agency/Firm that is not licensed
  • General Agent or MGA that oversees the producers
    activities
  • 4) A producer offsetting or reimbursing a fee to
    a client (insured).

40
AS 21.27.370. Sharing Compensation
  • Identifies conditions in which compensation may
    be paid to licensed and unlicensed persons .
  • Licensed Persons
  • A licensee must be licensed forthe kind and
    class of insurancefor which the person
    isauthorized to transact.

41
Sharing Compensation (cont.)
  • Unlicensed Persons Referrals
  • A licensee may compensate an unlicensed person
    that refers a customer or potential customer to a
    licensee if the person does not discuss specific
    terms and conditions of a policy, does not give
    opinions or advice regarding insurance (AS
    21.27.370) AND the referral is
  • On a one time basis
  • Nominal fee
  • Fixed in amount
  • Does not depend on whether the customer or
    potential customer purchased insurance and
  • Not contingent on the volume of insurance
    transacted.

42
Sharing Compensation (cont.)
  • Unlicensed Persons
  • A licensee may share a commission or compensation
  • with a business entity (firm) as long as the firm
    does
  • not sell, solicit, or negotiate insurance and the
  • payment does not violate our rebating laws.
  • A licensee may share an override commission with
  • a general agent for business produced by persons
  • the general agent supervises and the general
    agent has no involvement in the sale,
    solicitation, or negotiation of insurance.

43
AS 21.27.560Appointment of Producers as Brokers
  • Broker Contracts
  • AS 21.27.560 allows a client to appoint a broker
    through an executed contract. The contract must
    specifically set out the duties, functions,
    powers, authority, and producers compensation.
  • Under an executed broker contractexecuted under
    AS 21.27.560,a producer may offset or reimburse
    a client (insured) allor part of the
    commissionearned (disclosure required).

44
Compensation Options for Brokers Operating Under
a Contract
  • Fee that requires the producer to offset or
    reimburse the client for the full amount of the
    commission earned (AS 21.27.560(c)(1)).
  • Combination of fee paid by the client and
    commission paid by the insurer for which coverage
    has been earned that may offset or reimburse a
    client for all or part of the commission earned
    by the producer that is fully disclosed (AS
    21.27.560(c)(2)).
  • Commission paid by the insurer (AS
    21.27.560(c)(3)).

45
Permissible Compensation Options Under a Broker
Contract
  • With full disclosure,
  • A Producer may collect a fee, commission or a
    combination fee and commission under an executed
    contract with the insured.
  • The fee the Producer receives may offset or
    reimburse client (insured) for the full amount of
    commission earned.
  • The combination of the commission and fee the
    Producer receives may offset or reimburse client
    (insured) for all or part of the of a commission
    earned if the amount of the commission is
    disclosed to the client .

46
Limitations of a Broker Contract
  • Does not apply to renewal of existing coverage
    placed by the producer or to a premium deposit
    for the purchase of insurance.
  • The Producer can notassign the executed
    contractin whole or in part.

47
Is it a Rebate?
  • An exception to the prohibition of rebating for
    producers acting as a broker is contained in AS
    21.36.120. The provision in AS 21.27.560
    clarifies the role of a producer acting as a
    broker and provides the mechanism for a broker to
    reimburse or offset the commission amount
    charged.

48
Examples of Producer Inquiries
  • May a producer pay referral feesto unlicensed
    persons basedon percentage of leads
    whichresults in insurance sales?
  • May a producer offset orreimburse a client?
  • What is considered nominal?
  • May a general agent receive an override
    commission if the GA does not transact insurance?

49
Examples of Producer Inquiries
  • May a producer offer a gift card ofcertain value
    to any customerthat refers a potential
    customerto the producer?
  • Can a producer limit participantsfor a drawing
    to win a valuablegift to only those persons
    whoreceive a quote or insuranceinformation from
    the producer?
  • For any gift, monetary incentive, gift card or
    prize given away, is there a maximum value for
    that award?
  • May a producer make a charitable contribution to
    a non-profit agency in the clients name?

50
Factors Considered by Division
  • Referral Issues
  • What is nominal?
  • How often is the referral made?
  • Is the referral fee tied to thevolume of
    business generated?
  • Is the referral fee is fixed fee?
  • Is the compensation calculated on the volume of
    business transacted?

51
Factors Considered by Division
  • Drawings
  • Who may participate?
  • Is the purchase of insurancerequired to qualify
    for the drawing?
  • Is the person required toparticipate in any type
    of sales pitch?
  • Is the individual required toprovide any
    personal information?
  • What is the prize?
  • Can the participants be limited due to age?
  • Other types of marketing inducements.

52
Enforcement
  • Through Rate Regulation
  • Disapprove PC rate filings that propose to allow
    a producer to reduce his/her commission to lower
    the cost of a policy.
  • Evaluate rates/rules forpotential unfairly
    discriminatoryimpacts.

53
Enforcement
  • Responding to questionsabout different scenarios
  • Bulletins on fees
  • Bulletin B99-03
  • Bulletin B 04-14

54
Enforcement
  • Review proposed or executed contracts to ensure
    statutory compliance.
  • Conducted agency examinations respective to
    compensation arrangements.
  • Investigate complaints on producer activities
    involving referrals.

55
Examples of Division Responses to Rebating
Questions
  • The Division has determined that the following
    are violations of the rebating and/or
    non-discrimination laws
  • Negotiating commissions with clients outside of a
    broker agreement.
  • A gift, service, or anything of value used as an
    inducement to listen to a sales pitch or to
    obtain information would could lead to a quote.
  • Paying a portion of a clients premium.

56
Examples of Responses to Rebating Inquiries
The Division has determined that the following
are not violations of the non-discrimination and
rebating laws
  • Drawings that are available to any person in the
    general public and not tied to insurance. Not
    tied to insurance requires not asking a person
    whether they are interested in an agent
    contacting them about insurance or asking for
    personal information related to insurance and not
    just the drawing.
  • Offering different commission levels to licensees
    as long as the insurer allows the licensees to
    select any available level, the level selected by
    the licensee is specified in their agreement, the
    rates charged by the insurer reflect the
    commission level paid, and the licensee uses the
    selected commission level for all clients.
  • Giving away non-valuable items such as pens,
    calendars, mugs, etc.
  • A producer acting as a broker and under an
    executed contract may accept either a fee,
    commission, or combination of both with respect
    to an insurance transaction.
  • A producer may reimburse or off-set a fee to a
    client for all or part of a commission earned as
    long as full disclosure has occurred.

57
  • Again, we will not bemaking decisions
    onspecific rebating or discrimination questions
    at this meeting

58
Discussion Questions
  • When does a particular activitybecome a
    valuable consideration?
  • What standards should be usedin determining if a
    particularactivity is an inducement?
  • What standards should be used in determining when
    compensation is nominal?

59
Discussion Questions
  • From a consumer perspective what harm or benefit
    might result if some situations currently
    considered to be rebating were allowed?
  • Purchase decisions based more on price
  • Incentive to do excessive shopping around
  • Increase in unfair discrimination
  • Purchasing power of consumer large vs small
  • Lower price

60
Discussion Questions
  • From a producer perspective what harm or benefit
    might result if some situations currently
    considered to be rebating were to be allowed?
  • Small vs large producer
  • Urban vs rural
  • Personal vs commercial
  • By line of business
  • Resident vs non-resident

61
Discussion Questions
  • From an insurer perspective what harm or benefit
    might result if some situations currently
    considered to be rebating were to be allowed?
  • Insolvency (consider recent impact of legal
    competition via schedule rating)
  • Decrease in competition
  • Larger insurers become larger/small insurers
    leave market

62
Possible Future Action by the Division
  • Issue bulletin clarifying Alaska laws and
    including QA to
  • promote a level playing field through consistent
    interpretation and compliance with the laws and
  • reduce the number of questions the Division
    receives regarding the legality of a particular
    activity.
  • Possible legislative or regulatory changes.
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