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.